There’s a big problem with the traditional way a net worth is calculated. While it gives you a complete view of your finances, it can be very deceiving, and either overly encouraging or overly discouraging.
That’s because there are several components of the traditional net worth that are out of our direct control—like the value of your home or how the stock market does in a particular month.
For example:
- You do an OK job managing your finances in February, but the housing and stock markets do outstanding. Your net worth is up $20,000 and you feel great!
- You do an outstanding job enhancing your income and spending frugally in March, but the market has a dismal month and the house sale down the street depresses your home value. Your net worth is down $20,000 and you feel awful.
Neither scenario is very productive with respect to what you could actually act on to improve your financial situation.
While I do like to track my complete net worth on a yearly basis, I’m much more interested in what I can act on and track my “actionable” net worth on a monthly basis.
What is Actionable?
Here are the things we track in our “actionable” net worth:
- Checking account balances.
- Savings account or certificate of deposit balances.
- Credit card balances.
- Amount outstanding on any loans (car, student, mortgage, etc.)
That’s really it. Adding these up, you might find that this net worth is actually negative, or even more negative than your true net worth. That’s okay. Don’t try to make yourself feel better by including some of this other fluff.
The point is that every kernel of this net worth is controlled by our everyday choices. Every dime of income made, expenses spent, or cash saved is reflected in this bottom line. That gives us a really true month-to-month view of our progress.
What’s Not Actionable?
Here are things I specifically exclude from an actionable net worth:
- Resale value of your home.
- Total value of home inventory.
- Value of vehicles, boats, other assets owned.
- Retirement account balances.**
**Since you can’t control how the market does, but you can control what you put into these retirement accounts, I might suggest including the cost basis of these accounts (how much you’ve contributed) to track these “savings” contributions.
Note that things like the value of your home can be raised by way of home improvements or similar efforts. But that’s more of a long-term kind of thing and I would be able to see it when I look at the “true net worth” anyway.
Conclusion
While it’s great to track your overall net worth, looking at things you have direct control over will be more accurate when you’re dealing with short-term increments, like months, quarters, or even years.
Those short-term choices are where the real change happens, the change that slowly accumulates to big accomplishments.
Photo by Alejandro Peters
Fiscal Fizzle 
This is a really cool idea! I have never calculated my net worth because I never understood the point, but this actually makes sense because everything is real and tangible.
Thanks! It definitely makes it much more useful for me as a tool.
I think if I did my net worth that way, it would be really depressing 🙂 but I do include my credit cards, even though I pay off the balance every month.
Neat idea!
True, the number itself isn’t the most uplifting thing in the world. 🙂 But watching it slowly move up every month IS!
Good stuff Wojo. I think one’s net worth is an illusion, but when you cut up the actionable parts of your net worth, yes, definitely you can do something about it!
I think it’s useful, but to a point. Take car value, for example. Most of the time, it means nothing and just drops (making you more depressed about your finances!). But when you need some money, and you can sell your car for its value, it turns out there IS something there.
Looking at the big picture is still worth it from time to time.