Joel’s Note: This is a guest post from Hilary Martin.
Imagine you have made your way to the front of a crowded restaurant to check in for your reservation.
The clamor in the restaurant is so loud that the host can merely point across the room at your table.
You look. It’s the only table in the place with empty chairs – all the way in the back. Between you and those empty chairs are chatty people, food-filled tables, menus, babies in high chairs, and waiters with trays weaving their way through the maze to bring the guests their dinners.
Now here’s a question:
Would you step out on the busy restaurant floor with your eyes closed and expect to ever arrive at your dinner table?
Of course you wouldn’t. You’d trip, slip, and fall your way to the floor, likely hurting others and embarrassing yourself on the way!
Yet, that’s exactly what it’s like to attempt to navigate your financial life and achieve your ultimate goals without knowing your personal net worth.
Your personal net worth is simply the sum of the things you own minus the things you owe. It’s the current balances of your investment and bank accounts, plus the current values of any real estate, businesses, or other assets that you own minus any debts or obligations you have. It tells you whether you are net positive or net negative, and by how much.
So if you have a savings account, a checking account and a 2011 Honda, your personal net worth statement might look like this:
You Wouldn’t Drive in the Dark without Your Headlights On
So how can you be expected to steer your financial life in the right direction if you don’t know where you are or which direction you’re headed?
Knowing your net worth takes all of the mystery out of what it’s going to take for you to achieve your financial goals.
It is a powerful tool for your own goal setting and financial planning. After all, saving 10% of your income by rote rule will get you wherever it gets you. But to reverse engineer your success, you’re going to have to plan a little more scientifically than that.
Yet many of us choose to stay in the dark about our finances.
Why Ostrich Syndrome is So Tempting
It’s so tempting to keep your head in the sand and preserve the freedom to hand that credit card over to the sales clerk whenever you want something (without knowing how your spending and saving are lining up to create your financial future).
Money is an emotional subject for people and facing your numbers can be scary. However, your money doesn’t have a voice and the only way it can communicate with you is in the way that you organize and evaluate it.
Believe me. I get it, and I’ve been there.
Though it took some courage for me to face the numbers, I can tell you from experience that organizing and simplifying my finances by reporting on my personal net worth has made all the difference in getting myself on the path to success.
Creating an intimate and peaceful relationship with your numbers not only takes the uncertainty out of your financial life, it also takes the drama out.
I’m sure you’ll find it empowering.
Ultimately, you are creating your financial future right now. And you can either do that by default or by design, with hope or reality. The choice is yours.
Take Control with Your Own Financial Dashboard
Your personal net worth statement is your master financial control center, and there are several web tools that can help you access it.
LearnVest and Mint both offer an online tool that will calculate your net worth and provide you additional budgeting and investing functionality. Both services include a free iPhone app, letting you access your numbers on the go.
Once you log in, you’ll be asked to identify your various financial accounts and save your login credentials to the system. Then, both LearnVest and Mint can automatically pull your transactions and calculate your up-to-date net worth at the touch of a button.
If you don’t feel comfortable giving out your login credentials, you can calculate your net worth manually using a spreadsheet or even pen and paper.
Gather your account balances from paper or online statements and estimate the value of any real estate you own using Zillow.com. Then subtract mortgages, auto loans, credit card balances and any other debts. Calculating your net worth on at least a quarterly basis will go a long way toward tracking your financial progress.
Pro Tip: Calculate your target retirement savings (sometimes referred to as your “retirement number”) to clarify your financial path. That should give you a sense of the distance between where you are now and where you want to get. Remember that every great journey begins with a single step.
What Does My Net Worth Say About Me?
Absolutely nothing! As they say, it is what it is and nothing more than that. Don’t get caught up in the thinking that more is good and less is bad, that won’t help you get where you want to go. Give yourself the freedom to be peaceful about your current situation, and choose to have a beautiful adventure learning how to create the financial future of your dreams.
Hilary Martin, MBA, CFP® is a truth-telling personal finance enthusiast, author, and financial advisor with The Family Wealth Consulting Group in Silicon Valley, CA. Hilary’s financial advice has been featured by Women 2.0, The San Jose Mercury News, and NPR’s Marketplace. Keep in touch with her by subscribing to her Healthy Wealthy Families blog or follower her on Twitter @wealthyfamilies.