## 5 Steps to Calculating and Tracking Your Net Worth (And Why It Matters)

As we have previously discussed, your financial independence (FI) number that you are aiming to save is at least 25x your expected annual expenses. Keep in mind that you may either save this total FI amount as a lump sum, or have enough passive income each year to live off of, or a combination of the two. Your net worth is simply defined as the total value of all of your assets minus the total amount of all of your liabilities. Calculating and tracking your net worth allows you to see where you are on your FI journey, which is why this is one of the first steps to take once you decide to try to reach FI. Let’s discuss the five steps for how you can determine and track your net worth. Keep in mind that most couples will chose to complete this exercise all together, since if you’re married, you own your possessions jointly.

What is an asset? An asset is anything that you own of monetary value. For example, if you own a car outright, the asset amount is the current worth of the car (not what you spent on it). Other examples would be your retirement account(s) such as a 401(k), 403(b), 457(b), Roth IRA, traditional IRA, etc. Any physical cash in your possession or cash in your savings account would also be an asset. Assets could also be other valuable items such a jewelry, artwork, furniture, etc, though keep in mind that you would want to know their current worth, not what you paid for them or what you think that they are worth. Although many items that you own have some type of value, most will not include all the small items they own in calculating their net worth.

What is a liability? A liability is something that you still owe money on. I’m sure one of the top things that comes to mind for you is your PA student loan amount. Yes, any debt amount would be considered a liability. Other liability examples include credit card debt or other consumer debt.

Houses are a bit tricky. If you own a house, it is likely both an asset and a liability. For example, let’s say that you own a \$300,000 house, but still have \$250,000 left on the mortgage. In this case, the current worth of your house (\$300,000) would be an asset, but the \$250,000 mortgage would be a liability.

## 3. Decide Whether or Not to Include Your House into Your Net Worth Calculation

Although we just reviewed how a house can be considered both an asset and a liability, there is much debate in the FI community whether or not to include your home value in your net worth calculation. Some argue that they are going to need to live somewhere in retirement, so they should not include their home value into their net worth calculation, as they think that they will likely live in that house for many years to come. However, others argue that they may not be living in their current house in the future, but rather possibly may live in a more affordable residence if they decide to downsize or move to utilize geoarbitrage to their advantage.

Whether or not to include your home value into your net worth calculation is clearly a personal decision, but my husband and I personally do include it. Here’s why: although we live in a house, we likely will not live here for many years, and there’s only the slimmest chance that we would likely live here throughout our whole retirement. Additionally, the value of our house has significantly increased since we bought it for the following reasons: we have been renovating our home over the past four years since we moved in (because we had initially thought we were going to live here for quite awhile, in addition to the house being “stuck in the ‘80s”), and there has been a ton of development going on in our city near us. Big fancy houses being built around us are helping to increase the value of our house. So when we do decide to sell our house (depending on how the market is doing), we likely would be able to make a fair profit, which would help to increase our net worth further by investing it or putting down more equity into our next residence. The amount that we use for our house value while calculating our net worth is currently estimated conservatively since we do not know the actual value at this time (since the house in the middle of a renovation), nor do we know what the housing market will look like once we do sell it.

If you’re a home owner, you ultimately have to decide for yourself whether or not to include the value of your house into your net worth. Certainly if you also invest in real estate by owning properties, then the values of your properties and the mortgages that you owe would be both assets and liabilities to factor in.