Net worth, or the difference between what you own and what you owe, has become a common way to measure your financial health. While this is a useful metric, focusing too much on this one number can be misleading, leading to poor decisions and missed important opportunities.
Learn more about what net worth is
Net worth is the difference between your assets, such as savings, investments, and real estate, and your debts, such as loans, credit card balances, and mortgages. This is a simple calculation, but its importance can change depending on the time period you measure.
- your Current net worth Provides a snapshot of your current financial situation. However, this metric is meaningless unless you put it into the context of where you’ve been (financial history) and where you want to go (future goals).
- Net worth at retirement age The focus shifts to whether you have enough savings to maintain your lifestyle without an active income.
- meanwhile, Net worth at longevity—How old to live—considers how long your assets will last decades after retirement, taking into account variables such as medical costs and inflation, and whether you can leave a legacy to your heirs. Decide.
Tracking your net worth with these milestones promotes a long-term perspective and ensures that your financial strategy supports your goals and security, not just now, but for the future.
Boldin Planner displays these milestones on the overview page as important touchstones for where you are now and what it means for the future. Check your net worth:
- Track changes today and month by month
- next year
- 10 years later
- At retirement age
- Rate the year you were the richest
- Evaluate your net worth when you live a long time
Pros and cons of tracking your net worth
Here’s a look at the pros and cons of tracking your net worth, as well as tips for keeping this over-hyped metric objective.
Benefits of tracking your net worth
Pros: Promotes better financial habits – Checking your net worth monthly or quarterly, depending on your situation, is a good financial habit. Knowing your net worth increases your awareness of spending, saving, and debt. This awareness can lead to healthier financial habits, such as effective budgeting and more informed investment decisions.
When you track your net worth, use it as a window to think about where to focus your financial attention on what you can do now to grow your wealth over the long term.
Pro: Gain a clear picture of your financial health – Net worth provides a snapshot of your overall financial situation and helps you understand where you stand. It’s a simple and powerful way to track your progress over time in:
- reduce debt
- increase savings
- invest for the future
Pros: Encourages goal setting – Tracking your net worth regularly will motivate you to set and achieve financial goals. It can be very rewarding to see your net worth increase as you reach milestones like paying off loans or increasing your investments.
Pros: Increased sense of control over money – Tracking your net worth gives you more control over your future wealth. Although it can be stressful to face the facts of your financial situation, it’s actually the best way to make the right decisions. You may not necessarily like what you see, but you can be confident about your position and what you can do to improve your situation.
Disadvantages of tracking net worth
Tracking your net worth is a useful habit, but it’s not without its pitfalls.
Cons: It’s just one metric – Your current net worth is important, but it doesn’t provide a complete picture of your financial well-being. For example, it doesn’t take into account cash flow, income stability, or future liabilities such as medical expenses.
Try instead:
- Evaluate not only your current net worth, but also how that metric will change in the future, especially as you reach retirement age and live longer.
- Track your net worth along with other financial health metrics. Boldin Planner scores you on more than 15 different measures of financial health, with more added every quarter.
Cons: Can be demotivating – For some people, having a low or negative net worth can be overwhelming, especially those just starting their financial journey or facing setbacks. This number does not reflect your potential or progress in non-financial areas, such as building skills or advancing your career.
- This is one reason why considering your future net worth is so important. It is better to take actions that you can take now to achieve better results.
Cons: Encourages short-term thinking and poor decision-making – One of the downsides to tracking your net worth is that it can focus too much on immediate profits or losses, leading to impulsive decisions. For example, you may be tempted to sell your investments prematurely when market fluctuations reduce your net worth, even though it would be wiser to stick to a long-term strategy.
Similarly, an obsession with increasing your net worth quickly can lead you to prioritize short-term gains, such as hoarding cash or avoiding necessary expenses, over thoughtful, sustainable financial planning. This myopic thinking can derail long-term goals such as investing in education, health, and quality of life.
- To avoid this pitfall, it’s important to view your net worth as part of a larger financial picture, focus on long-term growth, and make decisions that align with your overall goals rather than short-term fluctuations. .
Cons: Too much focus on assets – Wealth does not necessarily mean financial freedom. For example, home equity can inflate your net worth, but it doesn’t provide easy access to everyday expenses. Similarly, prioritizing increasing your net worth can downplay lifestyle goals and experiences that bring you joy.
- Keep wealth in perspective. Your quality of life should always be a factor in your financial decisions.
Cons: Treats all debt negatively – Debt is a powerful wealth-building tool when used wisely. If you own a home and have a mortgage, this home debt can significantly reduce your net worth. But homeownership has historically been one of the best ways to build long-term wealth.
- Again, to build a complete picture of your financial health, it’s important to look at not only your current position, but also your future net worth.
Keep your net worth in mind
Run your own race
It’s easy to compare your net worth to other people’s net worth. (See Average Net Worth by Age.) However, it’s very important to remember that national comparisons are completely meaningless. To make relevant comparisons, you need to compare yourself to others in your zip code who have similar incomes, home values, and similar goals and values.
In a way, your current net worth represents who you are today. And your estimated net worth represents the kind of person you want to be.
Remember, you don’t have to be wealthy to be financially secure.
Focus on trends, not perfection
Net worth is most valuable when tracked over time, showing progress and highlighting trends. Don’t stress about fluctuations. Market changes or large purchases may cause your net worth to decrease temporarily without reflecting your overall financial situation.
Align your net worth with your life goals
Use your net worth as a tool to measure your progress toward the things that really matter to you, like financial independence, buying a home, and a comfortable retirement. Your life goals should guide your financial decisions, not an arbitrary number.
Consider other metrics
Balance tracking of your net worth with other indicators of financial health, such as cash flow, savings rate, and retirement readiness. These metrics can help you get a more comprehensive picture of your financial health.
Boldin’s Financial Wellness Score (part of the Boldin Retirement Planner) assesses your financial strengths and weaknesses across more than 15 different financial metrics.
final thoughts
Tracking your net worth is a useful habit, but it’s only part of the story. By keeping this metric in perspective and focusing on long-term trends and personal goals, you can use it to guide your financial journey without defining it. Remember, wealth is more than just a number, it’s about building a life that aligns with your values and priorities.
Create and maintain a comprehensive financial plan with Boldin Retirement Planner. Track a variety of financial health metrics, develop positive financial habits, make stronger financial decisions, and stay on track for the future you want.
