Before we started setting yearly goals, our Net Worth was the only financial benchmark I tracked. As we started investing bigger portions of our salary (15-20% of our after tax income) it started shifting dramatically. At the beginning of 2015, we started focusing on specific yearly goals. Tracking our Net Worth fell off my priority list for awhile. Since starting this blog I have started tracking it again, the first time I pulled everything together my guess was off by 8K or 11%.
I was off by an embarrassing percentage for someone who cares about Personal Finance. But does knowing where we stand actually matter? Is there value in tracking a number you don’t have direct control over? Read on to find out!
What makes up Net Worth
The simplest definition is to subtract your liabilities from your assets. It is definetely possible to have a negative overall Net Worth (we did about 3 years ago).
I would expect recent college grads that have student loans and another form of debt (car loan, credit card, mortgage) have a negative net worth. Its not a great feeling, but not worth panicking over either. It can be turned around quickly with some basic financial changes
There is much debate on what should count towards your net worth, one example being your primary residence. I will save that whole debate for another time, this article’s primary focus is: Does tracking Net Worth add value? Should you set a yearly Net Worth goal?
The Value of Tracking Net Worth
Benefits of tracking:
- Proof your strategy is working – If you are paying off debt, saving or investing over time the trend will be in the right direction. Hint: Its up and to the right.
- Motivation – When I pull our numbers for our quarterly updates, it motivates me to do better. Even if there is an overall decrease, I can see the debt dropping and our emergency fund rising.
- “Magic Number” Tracking – Depending how you define Net Worth, or what assumptions you make, your “Financial Independence Magic Number” might be your Net Worth target.
- Asset Allocation – The only way to know if your asset allocation is in line with your strategy is to put everything together and figure out the percentages.
So, in short – yes, it does add some value. But…..
While it adds value, I don’t see it as a yearly goal
While I do see the benefit in tracking your overall financial position, it has never been a yearly goal for us. Watching even mini corrections take place in major financial markets (US and International alike) I don’t think the majority of people should list net worth as one either.*
Goals should be something you can control. Something you can give YOURSELF a pass or fail at the end of the year.
I prefer to look at it this way:
Net worth is a product of meeting many smaller goals (controlling spending, consistently investing, increasing your savings rate, etc) with some time poured in.
The biggest issue I see using Net Worth as the primary metric, is getting discouraged by a down turn. Branding the year a failure even if you saved/invested a significant amount of your income doesn’t sit well.
Speaking of Market Fluctuations
We have technically only invested in a bull market, there have been a few mini-corrections that can rattle a new investor. At the end of 2015 and beginning of 2016 there were 10% plus drops in major indices. Looking at the chart it was far worse than the mini Brexit dip.
Thankfully I have spent a good amount of my free time reading about investing and the major financial disruptions in the early 2000s and 2008. The corrections did not change our strategy and actualy provide investment opportunities.
Ignoring Market Corrections: Mental Tricks and Strategies
Dollar Cost Averaging
This works by investing at regular intervals into the same asset, best example would be the contribution to your 401K out of your paycheck. As the price of shares drop, you buy more at a lower cost. As the markets return (Historically it always has**) the value/volume of shares at a lower price boosts your overall account balance dramatically.
Example:
As you can see from the above example, shares were bought ranging from 25, down to 17 and back up to 21. Even though you are down 16% on your first purchase at 25, overall you are profitable. If you stopped buying at $20 you would have left a lot of $ on the table as the price returns.
Balanced Investment Strategy
We split our investments across 401Ks, Roth IRAs, Emergency Fund (1% interest), Taxable Account, Employee Stock Purchase Plan, and a Family LLC.
We mostly invest in target date funds and total stock market funds with ultra-low expense ratios. Our 401Ks have a healthy mix of funds that cover all the different asset classes available to us.
Invest what we can afford
The chances of you losing everything if you have a balanced investment strategy are very, very slim. But there is still some truth to the saying “don’t bring what your not willing to lose.”
I look at it this way, if our investments go south, we are still going to be able to afford our house, cars, groceries, insurance, and maintain our standard of living (although we would pull back if it got really ugly).
Find a balance that makes sense for you. Then reduce some spending to shift the investment % higher over time.
Take Aways
Ultimately, I think there is much more value in setting specific yearly goals vs monitoring Net Worth. Even though their is value in tracking it, I feel like it steals the show and takes attention away from the work that goes into making the number happen.
Some may ask……… But why do you track your Net Worth Mr AE?
Part curiosity…Part proof…..And I think it will be a good story to tell as time progresses. I mean, it is interesting data for personal finance nerds to looks at.
However, For the foreseeable future our yearly goals will be our primary focus. That is how we grade our performance for the year and 99% of our time will go into creating, tracking and hopefully hitting them year in and year out.
Sooner than later I will take a stab at our Financial Independence Magic Number. After that I may start overlaying our Net Worth on that target and make some wild Way-To-Soon predictions.
Do you think Net Worth should be a goal? Is there value in tracking it? Do you agree with my thoughts that smaller yearly goals are more important to spend time on?
*Assuming the majority of investors hold investments that fluctuate (stocks, bonds, real estate) and do not have the majority of their money in guaranteed investments (CDs) or cash.
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Personal Capital: Personal Capital has a ton of great Free features, you can track your spending, net worth and even analyze your portfolio. It has top notch security and I am able to connect all of my accounts. Saves a ton of time!
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Monitoring it for fun, yes, setting a goal based on it, no. A Goal needs to be SMART. Net Worth is not a SMART Goal. Ay you mentioned while you do control some of the aspects of your movement towards a Net Worth number, a lot of it you don’t. If the market were to tank by 20% tomorrow, depending on your existing net worth your contribution for the year towards that goal wouldn’t matter. That would be a hell of a demotivated on the road to financial independence. However if you think of it in terms of yearly savings then your motivated to keep going.
Totally agree on the SMART goals. I am all about keeping motivation high – at least until the snowball is rolling without me pushing.
We didn’t start tracking our net worth until a few years ago and with the “pension factor” it is really hard to set a real number anyway. I agree with you that especially early on – you could have met many goals and still have a bad year in terms of net worth. I do think it is important to track – but I appreciate your take on it. Time makes those numbers matter more in my opinion. It’s fun to watch ours now – the faster our tenants pay down our mortgages, the faster that number grows!
Makes sense, I am not sure how I would look at a pension either – especially if they paid out at certain intervals. Almost more like cash flow?
Definetely think it is more important when tied to a FI or Retirement number as well.
I have no idea what methods are used to determine the number, but I know that in divorces with substantial retirement assets we often hire experts (typically CPAs) to appraise pensions. They are worth far more than the amount contributed, obviously, because they often involve a guaranteed return and hefty guaranteed payment even if you cease contributing at a young age. Perhaps an FI blogger with a background in accounting could enlighten us?
I could certainly use some knowledge on how that value is determined, because my wife is saving 9.3% of her salary – the maximum contribution – to her pension now, and we tend to just ignore it as “icing on the cake.” Gigantic hole in our FI calculations!
We only track our once or twice a year because it is the metric we have the least control over month to month. Our monthly expenses, savings rate, passive income number, and monthly nut percent: those are things we have more direct control over. And if we make sure those things are good, the net worth will go in the right direction…. eventually. But month to month or even year to year (depending on how large the assets are), there is a fair amount of luck.
Agreed – that is a great way to look at it. There can definetely be multi year downturns that can make your net worth look pitiful vs the amount of work you are putting towards it.
We had a negative net worth for a few years after we both graduated from college too, but we didn’t really think about it at that point. We didn’t really realize the reality of it until our mortgage lender spelled it out for us. At that point, we started paying more attention, but still didn’t do an annual net worth calculation. We started tracking net worth about 8 years ago (after I read Your Money or Your Life).
It’s probably better to set savings/investing goals rather than net worth goals, particularly if you are sensitive to market fluctuations. But if you are working on debt reduction, seeing those numbers drop on a net worth statement could be very motivating.
tracking debt reduction can be a powerful force and actually propel your mind in the right direction. I bet the average person doesn’t know where they stand overall, or even know how much debt they have month in – month out.
Thanks for the comment
I think it is important to be aware of your net worth and have a general idea of where a person falls on. I don’t think someone needs to track net worth more they at all though. Maybe check up on it once a year and assess the number but I feel on a month to month level it is silly.
I like looking in depth quarterly – for my own satisfaction more than anything – and honestly Personal Capital makes it so easy to do I can check occasionally when I am bored. I don’t put much stock in the occasional checks, so much changes day to day.
Thanks for the comment
Net worth is my long-term benchmark for success, but spending is the monthly figure on which I’ve always been most focused. That’s the one over which I have control day-to-day and week-to-week. The stock market or the assessed value of my condo might go up and down by an order of magnitude larger than my monthly spending, but that wouldn’t be good positive or negative feedback for my regular financial habits. Like you said, better to focus on what we control.
Spending is definetely important to track and another one the average person completely overlooks.
Agreed, using assessed values is tough – I have considered pulling our house out of our Net Worth calculations or tracking investible assets separately.
Net Worth is a good thing, mainly to keep track of where your overall efforts are going. Net worth tracking (or making it into an index as Amber Tree Leaves and we did) is not the holy grail obviously. It’s far more important to know how your assets are allocated, how they are performing and how they are spread over the various types of assets (to allow some risk managment). The overall number (i.e. Net Worth) is just a bonus 😉 But it does allow you to set targets, which can really aid some people.
The Amber Index approach is a good one – and something I might look to implement once we are a little closer and are debt free outside of our mortgage.
If tracking Net Worth or setting goals around it motivates – then more power to you.
I totally agree with you here. It’s much more important to set smaller, trackable goals which one has an effect on. Really, I’m a sucker for tracking stuff, and I have more fun with spreadsheets than I care to admit. This means that anything I can track, which will also show my progress, is very welcome indeed! Having said that, I only look at my Net Worth when I’m in need of motivation – it helps me to see how far I’ve come on this journey.
Thanks Ricard – I don’t think there is any harm in tracking and if it motivates thats an extra bonus. Hit those small goals!
My net worth is totally dependent not the vagaries of the market. I track it, but I don’t think its helpful. I’m pretty sure that if I ever have an inkling that its going backwards I’ll stop tracking it all together. It might be nice to have a long term graph i the future but I’m not sure who I would bother to show it to.
I’ve just kept a track of cashflow and have faith that taking the right actions towards my smaller goals will get me to my larger goals at some point in the future.
You are focussed on the right spot – all of those smaller goals will make great things happen.
As we get older – I think we will track it a little more closely and start to protect the overall Net Worth, but for now small goals and growth
It’s real easy to start an obsession over numbers and spend way too much time tracking net worth. I find myself more often than not checking the markets, net worth, amount of loans paid off, etc. These are really things that should be left to check once a month maybe, because watching them won’t help them change. It’s the same thing when I check site views a couple times a day; I really only need to do it once. Awesome post though, it’s an awesome question to ask!
Thanks Paul
technology makes it really easy to check – especially if you have a few down moments at work – I probably look more than I need to as well.
I am not so much a target setter for myself. I have the mindset for FIRE, and as a result I see nice savings rates pop up each month (or almost every month, holiday months are notoriously bad for our savings rate)
Holiday months can definetely take a toll on the savings rates. The mindset is the most important part.
I agree with your take on this. Tracking goals and targets you can control are more valuable strategies. Overall, you’d like to see your net worth rising but it’s probably better to look at 5-year periods rather than 1 year. Even in retirement I don’t expect net worth fluctuations to affect us psychologically. Also for someone whose high net worth consists mainly of a house value that continues to rise, that high net worth isn’t too helpful unless he’s willing to sell.
Nice article!
I do think that tracking NW is a “must have” and I like to set goals even if we all know that it’s strongly market performance dependent. Setting goals helps me being focused on reaching the final goal.
Great post! I think you came to a slightly more positive conclusion on net worth than I did (http://penniesanddollars.com/net-worth-even-matter/). Right now net worth tracking is the ‘in thing’, but I’m curious how many people are going to still be excited about tracking it when their net worth starts sliding during the next bear market. As far as I’m concerned, as long as my cash flow is positive, I don’t worry about my net-worth.