Creating wealth is not just about having a large portfolio or the latest Land Rover.
Wealth is measured not in Land Rovers or stocks, but by your net worth, which is your assets minus your liabilities. Your assets are composed of different things such as the market value of your home, the money you have in your bank accounts, the value of any investments, personal property, artwork, and your car. Your liabilities, on the other hand, are what you owe. This can be student loans, your mortgage and credit-card debt.
Net worth is the bottom line of all your financial efforts. Once you have that number you can compare it to where you are and where you want to be. The gap between those two figures will help you to focus on what changes you need to make.
Step 1. Calculate your net worth.
Determining your net worth is not hard. There are many tools and apps available online to help you with this. If you prefer to do it old school, then a spreadsheet is perfectly fine. Some online apps that will help you track your net worth automatically are Mint and Personal Capital.
If you decide to go with the spreadsheet, you will need to know the value of your assets, including the value of your home. You can do this by comparing the homes sales in your area using Zillow. Copy down the balances in your checking, savings, and investment accounts. If you don’t know the value of your car, Kelley Blue Book will give you an approximate value. You will need to know the exact amounts of your all your liabilities and list them in a separate column.
Step 2. Compare your progress over time.
After you have determined your net worth, you can gauge your progress from year to year. Ideally, you want to be worth 15-20 times your annual income by the time you are 60. If you are over 40, you should be saving more aggressively than someone in their 30’s. Yearly, your progress should increase. Keep in mind, if you are a homeowner, then your property will appreciate in value, thus increasing your net worth every year. As the assets increase in value, your mortgage, or liabilities will decrease.
By putting a large gap between your assets and liabilities, you should be able to retire without worrying about your future. By achieving a net worth of 15-20 times your annual income, you can be financially free for retirement.
Step 3. Adjust your net worth to reach your goals.
By keeping a close eye on your net worth, you will be able to track and identify any areas that need adjustment. If your expenses are going up instead of going down, then you need to identify areas that can be cut. If your income is not progressing, then perhaps you can do a side hustle to help widen the gap. Participating in any company matched 401ks and stop options where the money is automatically taken from your check will also help you meet your long-term goals.
By cutting spending, increasing income, and monitoring your net worth, you can break the bondage that money has a hold on you and blaze a path to financial freedom.
Tracie Breaux is the founder of The Cash Queen and she’s passionate about empowering women to achieve financial independence.