What to Include in Your Net Worth
There are a lot of ideas on what to track in your net worth and this blog post is dedicated to talking about that. I think it's worth noting right off the bat though, that there's no specifically right or wrong way to track your net worth. Now that I've said that part, I do want to point out that lots of people track the wrong stuff in their net worth. I'm happy to provide my personal thoughts on what the appropriate items to track are and I'm also happy to provide context on common items that people track that I don't feel should be in your net worth.
I get into why you should start tracking your net worth in my post about How to Start Investing so be sure to check that out after you read through this!
Net worth calculations are really just for you and your family to have a bird's eye view of everything that you're doing. I track ours every month on the first. I chose the 1st because it's a clean time of the month to do it and because Mrs Money Smith and I both get paid on the last of the month, so this is the best point for a clean month over month comparison. I also track our's manually as I feel that is the best way to account for everything, though there are a few free tools online that you can use if you're not as committed as I am. Alright, now that I've given a quick overview, I'm just going to jump into the list - get yourself a glass of water because this might get long.
Cash - This one is easy, it is the epitome of an Asset. Definitely track it. We have our standard checking account and a separate Barclay's savings account. It's worth noting that we also have a couple smaller checking accounts that we don't maintain. These were accounts that we needed to put an initial deposit of around $25 to get access to loan options. I don't consider those in our net worth because they frankly aren't big enough to matter, nor do they change much, if at all.
Personal Investment Accounts - This one is also a resounding yes. While less tangible than cash, your investment accounts are a great indicator of not only your personal valuation, but they also help to hint at how the overall market is doing. The easiest example of these is a peer-to-peer lending account. We use LendingClub and are happy with it so far :)
Income - Whether your talking about the amount in your paycheck, or a bonus, or even a winning lottery ticket, these don't go in your net worth. That's because they should be captured in your cash amount. The cash number should provide a snapshot that only updates on the day you track. The inflow and outflow of money with those accounts isn't specifically captured in your calculations.
401k accounts - I specifically call this out separately from personal investment accounts because this is generally something that is a little more automated. This is something that I track for both of us - It's actually pretty good practice to keep it tracked simply because with moving jobs, you might quickly find yourself with more than one 401k account. Keeping monthly track helps to hold onto everything in one spot so you never forget it, that and it's always fun to watch it grow relatively fast considering your employer can also contribute to it.
Primary Residence - This one can be interesting, in the investing world there's a lot of debate as to whether your primary residence is an investment. I am generally on the side of saying that it isn't an investment, but that doesn't keep it from being tracked in your net worth. I will say that I track our property differently than others. A lot of times I see the house being tracked by following the Zillow estimate each month. To me that sets a dangerous precedent that your property is continuing to rise in value at a constant rate. While this is likely true, I fear that considering this number in your calculations could quickly overshadow other accounts that aren't moving as fast. The way I track property value is to set it based on the last actual appraisal that was done. Even if you just spent $30k on a new kitchen, that doesn't change the number until you're actually told what it is.
Investment Properties - This is called out separately simply to help narrate the Primary Residence piece. I track these the same way, and only change the number when an appraisal comes through.
Cars - This is one I see all too often. Cars aren't an investment and don't represent money owed to you. This doesn't make sense to keep track of, simply because you aren't buying a car to get money out of it. The arguments for cars is generally similar to primary residences - You need a car, the car constantly loses value, and it isn't actually worth anything until you go to sell it, in which case you will likely just go buy another car. This is different than auto loans, which I will get to in a second.
Household Belongings - Anything that sits in your house falls into this category, that could be furniture, jewelry, appliances, electronics, collectible memorabilia, etc. As much as I wish I could look at the fancy gaming computer on my desk and say that it's worth money, it just isn't. These items are not only just too much to actually track their value, the same argument for cars tends to fall on them. The reality is that no one is likely to buy your items for much when you go to sell them, and when you do, those amounts will be captured in your cash line anyway.
Life Insurance - This is another one that I've seen on various other blogs. It doesn't make sense to me to track this stuff. Just because you're paying for a million dollar life policy, doesn't mean that it's actually made you worth a million dollars. This is another item that will be captured in your cash line when something actually happens, and until then it certainly isn't any good to you.
Loans Owed to You - I think that keeping tack of money owed to you is incredibly important. You certainly shouldn't be loaning money out if you don't expect to get it back, but I like to operate under a trust but verify type of mentality. The flow of money from the person that owes you money would be tracked in the cash line and the reality is that some loans just might not get paid back. That's something that needs to be said, so there's no point in holding those amounts in your net worth calculations, because then you're simply treating that item as an accounts payable line, which isn't what net worth is for.
Credit Card Balances - This is certainly something you want to keep track of, this will always be a liability because it represents negative net worth for you. If you have $1,000 in the bank and $2,000 in credit card debt, you effectively have a net worth of -$1,000. Net worth isn't just about tracking your wins, it's about tracking your losses too.
Student Loans - These feel like a huge burden for many Americans and fall into the same category of credit card balances. These are represented on your liabilities lines, I currently have 5 different disbursements that I keep track of and I like to track them all separately due to the different interest rates that mine happen to be in.
Auto Loans - This may be something people disagree with, but I feel that cars should only be represented as a liability, due to mainly the reasons that I pointed out above. To me, a vehicle only represents money going out. Even if you're driving for Uber, you're only inflow of cash with that is through your pay, which is captured in the Cash line.
Mortgages - This liability is actually one that I enjoy tracking quite a bit. The reason I like it is because of how I track property worth. Though a mortgage is a liability, the amount that my mortgage represents gets smaller and smaller each month, while my properties stay the same. The expectation is that the house will continue to grow in value, unless it burns down, and the mortgage note will only continue to shrink in value! Mortgages likely make up the majority of your liability line, but they are an alright liability to have in my book.
PLoCs/HELoCs - Equity lines are similar to credit cards in how they should be treated. Just because you've been approved for a limit of $50k, doesn't mean that your net worth has increased that much. They are only a liability, the way you can turn this money into an asset is through leverage, but that's not to be represented in your net worth calculations.
Actually calculating your net worth is a relatively simple math calculation, you just take all of your assets, subtract out all of your liabilities, and that difference is your net worth. This is just one piece of a puzzle in how your family is doing, but helps steer conversations around budgeting and goals. Our net worth only just went positive two months ago, but we still considered ourselves to have a healthy lifestyle. Your net worth doesn't dictate who you are as a person, but it should ideally increase in a positive trend every month. If you find yourself trending down in your calculations then you can see at a high level where you're falling down and can devise a way to pick yourself back up!
What are your thoughts on these metrics? Are there other items that you track in your net worth? Do you disagree with any of my thoughts on this?