By Jon of Compounding Pennies
When it comes to building wealth and becoming wealthy, most people focus on either making the most money possible or cutting every possible dollar from their budgets. While doing these things is needed in order to grow you wealth, there is one part of wealth creation that many people overlook.
It is tracking your net worth.
You might be wondering how in the world tracking net worth leads to wealth. Luckily for you, I will show you 3 ways how tracking your net worth will improve your finances.
I’ve been tracking my net worth consistently since 2003. Since then I have gone from credit card debt of over $10,000 to no debt and a net worth of close to $1 million.
How did I do this? The key was knowing my net worth. Keep reading to learn how it will help you with your finances too.
3 Great Reasons For Tracking Your Net Worth
#1. It Shows You Where You Are
The first way tracking net worth improves your finances is by showing you where you are. Do you know how much money you have in checking or savings accounts? What about all of your investment accounts? Or even how much debt you are in?
When I started tracking my net worth, it opened my eyes. I was in debt and was trying my best to be ignorant to just how much debt I was in.
But writing everything down on a piece of paper and seeing that I owed more than I was worth was eye opening.
Without seeing my net worth, I probably would have continued on the same path I was on. Today, instead of having close to $1 million in assets, I would most likely still be struggling financially.
But by taking the first step and seeing my net worth, I was able to see my finances in a different way and start to take action to change it.
#2. It Motivates You To Save
The next way knowing your net worth helps you to improve your finances is that it motivates you to save more money. I wanted to get out of debt and start growing my income. Seeing my net worth motivated me to take action.
Instead of paying the minimum each month on my credit card debt, I paid a little more. Instead of saving 5% in my 401k plan, I saved 6%. I didn’t make major changes to my finances, just little ones.
At the time, that was all I could do. Money was tight, so I made the best of the situation. Slowly but surely, my debt started to drop and my savings began to grow larger.
After I was out of debt, calculating my net worth helped me to save more money. Now that I had some padding in my checking account, I was putting more money into savings accounts and investments.
I would see that my Roth IRA was worth $6,500 so I would challenge myself to get it to $7,000 as fast as I could. When I hit that number, I would try for $7,500.
The challenges never stopped. Today, I still strive for saving more.
#3. It Makes You More Aware Of Money
Finally, knowing my net worth makes me more aware of money. It helps to solidify my values and goals. I no longer waste money on things that don’t add value or help me to reach my goals.
Before I tracked my net worth, I would just buy whatever I felt like buying.
After a few days or weeks, I never used that item again. I got caught up in the moment and just bought things because I was bored or because I thought they were what I wanted.
Once I started keeping tabs on my net worth, things changed. I wanted out of debt and to grow my savings so I began to question my purchases. Do I really need this? Will I use it?
By asking myself these questions, I overcame impulsive buying and as a result, was smarter with my money.
In the end, tracking my net worth has had a dramatic impact on my finances. I know that following your net worth will help to improve your finances as well.
It might be hard at first to sit down and write out all of your debts and see you aren’t worth that much financially, but it will motivate and encourage you to start taking steps to improve your situation.
And in time, you will look back on where you were and how far you’ve come and realize that tracking your net worth was one of the best things you ever did.
Author Bio: Jon blogs at Compounding Pennies, a personal finance site that helps readers improve their finances one day at a time.
Amanda Kay, an Employment Specialist and founder of My Life, I Guess, strives to keep the "person" in personal finance by writing about money, mistakes, and making a living. She focuses on what it’s like being in debt, living paycheck to paycheck, and surviving unemployment while also offering advice and support for others in similar situations - including a FREE library of career & job search resources.