Ben asks: “I’ve started filling in the Moneystepper Savings Challenge Tracking template. Why do I need to measure my net worth? If I’m always investing as wisely as I can, and always putting as much as I can away each month, won’t it look after itself?”

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Q&A 59 – Why Does My Net Worth Matter? – Shownotes

Ben asks:

I’ve just started filling in the Moneystepper Savings Challenge template and I completely understand why I need to complete a monthly budget each month so I’m always putting away money for the future.

But, why do I need to measure my net worth? If I’m always investing as wisely as I can, and always putting as much as I can away each month, won’t it look after itself?

 

The Tracking Template Spreadsheet

Ben. First of all, thanks for downloading the Moneystepper Savings Challenge spreadsheet. I hope it’s helping you get a grasp on your finances and acts as a catalyst on your financial journey as it’s doing for everyone in the community.

Remember you can download the tracking template for free at moneystepper.com/jointhechallenge, where you can also join the challenge with a 10% discount by using the promo code “podcast”. Also, remember that entry is at a reduced price of £39 until the end of 2016, so you only have one more day to join at this price:

Anyway, onto your question Ben.

 

The Power Of Net Worth

To an extent, you are right. The monthly budget ensures that you keep your spending under control on a consistent basis. This will ensure that you spend less than you earn and, as a result, your net worth will always be increasing.

However, as your net worth grows, more and more of your annual increase in your net worth will come from your investments rather than your standard salary.

By measuring your net worth on a consistent basis, it helps you realise where you have your money invested and how this is growing. It also helps with understanding and measuring diversity across your portfolio.

Finally, it also helps you understand how close you are to “financial freedom” – whatever that means for you. By measuring your net worth, you can see where you have your money invested and theoretically what returns you can earn on those investments. By then comparing this to your average expenses, you can determine whether those investments can support your level of spending, which is a key indicator of financial independence.

It also gives you a consistent measuring point against your goals. I don’t know many people who have a goal to make £2,000 more each month by the time they are 60 than they spend. However, many more people will have the goal to have £1m net worth (or any other figure) by a specific age. This can then be the driver of the first objective of having “income” (including investment returns) which exceed expenses.

 

Understanding Your Debt & Nature Of Income/Expenses

It also helps you understand if you have “good debt” or “bad debt” on your liabilities side and hence help you focus on which debt you want to repay.

Many people make the mistake of not measuring their net worth on the basis that they have a good salary.

For instance, if your income is £50k a year and you spend £40k a year, you will could be:

• earning £50k from your salary, earning £0k from your investments and paying £20k in debt interest
• earning £30k from your salary, earning £20k from your investments and all your £40k is spent on things that you enjoy

Whilst I’m not saying the latter is optimal, it’s certainly better than the first option, and accurately detailing your net worth (all of your assets and liabilities) will help you understand where you sit on this spectrum.

Only measuring your monthly budget and investments is akin to running a marathon and only recording your training times rather than the actual marathon time itself. Think of the net worth as your goal and your reward – if you can achieve consistently substantially positive net worth goal each year, you’ll certainly be able to reward yourself in the future.

Hope that helps and explains why net worth is such an important measurement of wealth. If you want help measuring your net worth (and budgeting), remember to head to moneystepper.com/jointhechallenge to download our free template which includes goal setting, net worth measurement and a monthly budget to help you fully control your finances ready for the New Year.

And remember, join the challenge before the end of 2015 to obtain the special price of £39 (usually £99) and the promo code “podcast” to receive a further 10% off.

See you there!

 

Ask Your Question

This show runs three times a week and answers all of your personal finance questions. If you have any questions, please don’t be shy to ask. You can ask in three ways:

1. Leave a comment on any of the Q&A podcast shownotes (including this one)
2. Email me at moneystepper@gmail.com
3. Leave a message on the Speakpipe App which you will find below and on our “submit a question” page: