Investing

How Tracking Your Net Worth Can Help You Build Wealth

Calvin Lo

Have you been earning an income for some time now but don’t feel like you’re making much progress in building your wealth?

Earning a higher income does not equate to becoming wealthier, unless you can keep your expenses in check.

If your expenses are increasing at the same rate or faster than your income is (a.k.a. lifestyle creep), your wealth might actually be shrinking.

What is Net Worth?

One useful measure of wealth is net worth. Net worth is basically your assets minus your liabilities. It’s akin to a shareholder’s equity in a company’s balance sheet but on a personal level.

For a company, its shareholder equity can only increase if the company is making a net profit. Likewise on a personal level, our net worth increases when we have a positive balance left from our income after offsetting all our expenses.

If we’re always eating into our savings every month, our net worth might actually be shrinking unless maybe if a large part of our cash is actually going into paying down debt on appreciating assets.

How to Track Net Worth?

While having a budget and tracking our income vs expenses regularly is important to keep our spending in check, over the long term it is also crucial to take occasional snapshots of our net worth.

We can do this by gathering the value of all our assets, e.g. bank and trading account balances, market value of our securities (stocks, bonds, etc), and an estimated market value of big ticket items like a house or car.

We also need to also compile our liabilities, e.g. outstanding credit card debt, personal loans, housing mortgage loans, car loans, etc.

Then, we can calculate our net worth by netting off total liabilities from total assets.

By taking regular snapshots of your net worth (annually or semiannually), we can see how our net worth is progressing.

Ideally our net worth should be growing, barring big milestone expenses like a wedding or welcoming a newborn child. In the absence of these events, if you realise that your net worth is stagnating or worse, shrinking, you should take a good, hard look at where your money is going.

Increasing Your Net Worth

There are two main ways to increase your net worth:

  1. Increasing your savings rate
  2. Getting a higher return on your assets

Your savings rate is basically how much you’re saving from your income after expenses. So to increase your savings rate, you can either increase your income or reduce your expenses.

In the short term, reducing your expenses might be the lower hanging fruit. However, there will come a limit to how much you can cut from your expenses before it affects your lifestyle considerably. After all, we deserve to spend on ourselves reasonably after working hard to earn that money.

Increasing your income is considerably more difficult and takes longer, but there’s no limit to how much your income can be. In order to really build wealth fast, you should also consider ways to increase your income generating capability including but not limited to asking for a raise at your job, gunning for a promotion, or starting a business or side hustle.

Another important avenue to increase your wealth is by getting higher returns on your existing assets. Unless you’re fresh out of college or only just started earning an income, the proportion of your assets should be considerably higher than your annual savings.

For example, for someone earning $60k/year, increasing his/her salary by 1% translates to an additional $600/year, assuming expenses don’t increase. The same effect can be achieved by increasing the returns on $60k of savings by 1% per annum.

Conclusion

Tracking your net worth is not merely just an exercise but involves a mindset shift. Though this exercise, we might be able to better understand the impact our financial decisions and actions have on our wealth over the long term.

We might be fixated on advancing our careers and getting a higher salary, but end up spending more on a bigger house, a more luxurious car, or more lavish meals.

To make matters worse, we might be letting our idle funds (except emergency funds) sit in low-yielding bank savings account earning us close to nothing.

The first step in building wealth is identifying the state of our financial health as it stands now, in order for us to make the right adjustments going forward.

Read more investing tips in my Guide page.

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Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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Disclosure: This post may contain affiliate links and I may get a commission when you click on the links or open an account through the links, at no additional cost to you. I only recommend products or services that I have personally tried and have found useful.