Do you know your net worth? That’s how much is left after subtracting your liabilities from the total value of your cash and assets.
At first glance, figuring out how much you’re worth may seem pointless. You’re probably not going to bump Warren Buffett or Bill Gates from their spots on any “World’s Wealthiest People” list anytime soon. But no matter how much you earn, knowing your net worth is important.
Here are three reasons why monitoring your net worth can help you manage money better. (See also: 10 Ways to Increase Your Net Worth This Year)
1. Your net worth doesn’t lie
In our culture, it’s easy to convince ourselves that we’re doing better with money than we actually are. We can finance nice cars, pay for the latest fashions with plastic, and even “buy” a more expensive home than we can realistically afford. But our net worth tells it like it is, and that can be a very helpful financial wake-up call.
In the personal finance classic, The Millionaire Next Door, authors Thomas Stanley and William Danko draw an important distinction between people who look wealthy but aren’t (they call them “Big Hat, No Cattle”), and those who don’t look wealthy but are (where the title of their book came from). If you’re going to build wealth, it’s far better to be in the latter group.
The concept of being unassumingly wealthy is also known as “stealth wealth,” and it’s a lifestyle worth striving for. People with “stealth wealth” maintain a high net worth by avoiding dumping their cash into shallow, depreciative purchases. Their modest approach to money management allows them to achieve such dreams as early retirement, entrepreneurship, traveling the world, and more.
After calculating your net worth, ask yourself: Do I look wealthier than I am, or am I wealthier than I look?
2. Your net worth shows whether you’re making progress
To be sure, there are other ways…