Soon after the beginning of a new year, I encourage people to take a snapshot of their net worth. We’ve covered it here before, but doing so is a straightforward exercise that will most likely take under an hour.
In its simplest form, you just need to build a spreadsheet with two columns. On the left side are your assets — 401(k)s and other investments, real estate, vehicles, checking and savings accounts, and college savings plans. On the right, you list your liabilities, including your mortgage, car loans, credit cards and student loans. Total up both categories and then, using the formula every accounting student knows, subtract total liabilities from total assets to arrive at your net worth.
While a simple spreadsheet will do the job, you can also use apps like Quicken, Simplifi, Empower or Rocket Money to track this automatically. After you’ve done the hard work of coming up with this figure, what exactly should you do with it? Here are a few reasons that tracking your net worth can do wonders for the finances of you and your family.
Measure Your Progress: Tracking your net worth once a year gives you an insightful snapshot of the progress you’re making in your financial life. While most of us are very familiar with our income, far fewer people know their net worth. That’s strange, because net worth is arguably a more important measure of whether you’re moving toward financial independence. By taking a snapshot every year — I recommend a different tab in your spreadsheet for each year — you gain perspective on your pace of progress, even when the day-to-day details feel messy.
Identify Opportunities to Simplify: Early in my career, my old boss used to call this the “weed garden.” He was referring to the sometimes dozens of accounts prospective clients would bring in. While there are occasionally good reasons for that level of complexity, more often it’s a sign of neglect — a byproduct of busy lives and decisions that made sense at the time. Over the years, this can turn into five different 401(k) plans, multiple savings accounts, a high-interest CD at another bank, an annuity, and several IRAs. In many cases, it makes sense to consolidate accounts into best-in-class options. For example, if you have several old 401(k)s, it may be worth rolling them into the plan with the lowest costs and strongest investment lineup.
Do a Solid for Your Family: This benefit is less discussed but may be the most important. If you’ve ever had to sort through the finances of an incapacitated or deceased family member, you know how difficult it can be when you don’t know where all the proverbial gold is buried. If you were lucky enough to inherit the role from someone who kept meticulous records, consider following their example. Over the years, I’ve seen many clients struggle to piece together their parents’ finances, often with no idea what accounts or insurance policies even existed. A decade ago, you could at least “watch the mailbox” for statements. Today, with electronic delivery the default, those clues may never arrive.
This is where tracking details beyond net worth becomes valuable. Information on life insurance, disability and long-term care policies can be critical, as can knowing where deeds, titles and estate documents are kept. Even basic guidance on how to access accounts — or a password manager, if you use one — can make a big difference. Most password managers now allow you to designate a trusted contact. There is, of course, risk in gathering all this information in one place, so password protection and basic security measures are essential to keep it out of the wrong hands.
Taken together, a simple net worth snapshot does more than tally dollars and cents. It brings clarity to your progress, reduces complexity over time, and gives the people you care about a far better roadmap if they ever need to step in on your behalf. In that sense, a net worth statement isn’t just a financial exercise — it’s an act of consideration. And like many of the best gifts, its true value may only be realized when it’s needed most.
David Gardner is a certified financial planner in Boulder County and is admitted to practice before the IRS. He can be reached at entreewealth.com. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.
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