Once you’ve established your “20 Mile March,” how do you track your progress along your journey? The key tool is your personal balance sheet. Your balance sheet tracks your assets and liabilities so you know your net worth at any point in time. Here’s how it works:
Assets – Liabilities = Net Worth
If you list all of your assets, subtract all of your liabilities, the result is your net worth which is what is available to help you reach your future financial goals.
To determine your net worth, follow these steps (see Figure 1):
- List all of your financial assets (bank accounts, investment accounts, retirement accounts, real estate, etc.) and add them up.
- Next, list all of your liabilities and add them up.
- Finally, subtract your total liabilities from your total assets to get your net worth.
Use this data to make observations.
- Is you net worth positive or negative? A positve net worth shows you have net assets to fund future goals.
- How are your assets distributed? Do you have sufficient liquid assets to meet emergencies? Is most of your wealth in long-term assets like retirement accounts or illiquid assets like real estate?
- How much of your debt is comprised of unproductive liabilities like credit card debt?
You can gain even more insight by observing the change in your net worth over time. Establish a month-end ritual in which you sit down on the last day of each month with a cup of coffee, your spreadsheet, and your month-end statements. Fill out your balance sheet monthly and observe trends. For example:
- Is your net worth changing from month to month? About how much does it change?
- What is driving this change—increased contributions to retirement accounts? Increased or decreased debt? Change in investment values or a combination?
Once you’ve identified trends, you can use this data to further your 20 Mile March. For example, if your aim to increase your net worth 10% a year, determine exactly where these changes can happen. Your net worth increases when assets increase (through savings or increased investment return) or when debt decreases.
In our next edition, we’ll discuss key strategies to increase net worth.