'Net worth' simply refers to your financial position or, more simply, how much you've saved so far and how much money you owe to others. Think of how much you make (your income) as a financial income statement and how much you own and owe (your net worth) like a financial balance sheet. In your 20s, you are unlikely to have a lot of money or assets, but a lot of debt (also called 'liabilities'), so why would you bother learning about your net worth if you already know it's in the negatives?
Well, here are a few reasons why:
Income Does Not Equal Wealth
If you make a lot of money, but you spend all of it, you are not any wealthier than someone who makes less money, but does exactly the same thing. Both of you would have saved a big fat zero.
People who make a high income aren't necessarily the best at saving it, and those who make less money may just as well be more frugal and better at saving. At the end of the day, it seems like only the ones who are able to save their income instead of spending it are wealthier than those who don't.
Set Goals by Net Worth, Not by Income
Income is fickle. It can change for better or for worse and is not something you can truly control. So, it's really what you save from your income that matters. If you set goals by net worth, you'll know if you are on track to meet your financial goals, and if you aren't, you'll know by how much you're off. You'll also have complete control over your net worth because you're the one who's spending your money or saving it.
You should consider setting net worth goals for where you'd like to be in two years, five years, 10 years, 20 years and up until when you plan on retiring; then check each year if you're on track to meet your goals or not.
How Long Until You're in the Green?
If you took out a student loan to pursue some form of post-secondary education, having a positive net worth after graduating is the main goal, even if it's just $1.
If you track your net worth yearly, you'll know exactly how long before you have a positive net worth. It may even motivate you to save more money by reducing expenses to reach that goal. For instance, if you are only $5,000 away from having a positive net worth, suddenly you may be re-thinking an expensive purchase, just to reach that goal.
Changes You May Need to Make
Even if you're still a student in your early 20s, tracking your net worth lets you see how much debt you will have by the time you graduate. You may decide that your student loans are accumulating a lot faster than you had expected, and you might want to cut back or find a way to reduce that debt.
Also, if you've cut back as far as you can go in your spending, but you still aren't paying down your debt fast enough, perhaps you'll decide that you need to pick up an additional part-time job to help keep you on track.
Calculate Your Net Worth
You can calculate it month-to-month, but it should be done at least on a yearly basis to see how far you've come financially from the year before. For instance, if you have $25,000 in the bank, but you owe $20,000 in student loans, your net worth would be in the black at $5,000. However, more likely than not, at this point in your life you probably owe more than you own, so your net worth would actually be in the negatives.
The Bottom Line
The bottom line is your net worth will always be an important number to know at any age because it is a true benchmark of your financial position, and even if your net worth is in the negatives, it is still important to see if you are on track to meet your financial goals.
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