Net worth — the difference between what you own and what you owe — has become a popular way to measure financial health. Although it can be a useful metric, focusing too much on this single number can also be misleading, lead to poor decisions, or mean you’re missing important opportunities.
A more detailed look at what net worth is
Net worth is the difference between your assets — such as savings, investments, and property — and your debts, such as loans, credit card balances, or mortgages. It’s an obvious calculation, but its importance can change depending on the time period in which you measure it.
- for you Net present value Provides a quick overview of your financial situation today. However, without putting this metric in the context of where you’ve been (your financial history) and where you want to go (your goals for the future), it’s fairly meaningless.
- Net worth at retirement age It shifts the focus to whether you’ve made enough to sustain your lifestyle without active income.
- Meanwhile, Net worth in longevity– The age you might live – represents how well your resources last across decades of retirement, taking into account variables such as health care costs and inflation, and will determine whether you can leave a legacy to heirs.
Tracking net worth at these milestones encourages a long-term perspective, ensuring that your financial strategy not only supports your present, but also your goals and future security.
The Boldin Planner presents these milestones on the overview page as important touchstones for how you are performing today and what that means for your future. See your net worth:
- Today and monthly changes
- Next year
- In 10 years
- At retirement age
- Evaluate in which year you are richest
- Evaluate your net worth based on your longevity
Pros and cons of tracking net worth
Here’s a look at the pros and cons of tracking net worth and tips on keeping this overused metric in perspective.
Pros of tracking net worth
PRO: Promotes better financial habits – For context, checking your net worth monthly or quarterly is a good financial habit. Knowing your net worth encourages awareness of your spending, savings, and debt. This awareness can lead to healthier financial habits, such as effective budgeting or making more informed investment decisions.
If you track net worth, use it as a window to focus your financial attention on what you can do now to improve your long-term wealth.
PRO: A clear picture of your financial health – Net worth gives you a quick snapshot of your overall financial situation, helping you understand where you stand. It’s a simple and powerful way to track progress over time as you strive to:
- Reduce debt
- Savings development
- Invest for the future
PRO: Encourages goal setting – Regularly tracking your net worth can motivate you to set and achieve financial goals. Watching your net worth grow while achieving important milestones like paying off loans or increasing your investments can be incredibly rewarding.
PRO: It can increase your sense of control over your money – By tracking net worth, you have more control over your future wealth. Facing the realities of your financial situation may seem stressful, but it’s actually the best way to start making the right decisions. You may not always like what you see, but you will be sure of where you stand and what you can do to improve your situation.
Cons of tracking net worth
Although tracking net worth is a useful habit, it’s not without risks.
CON: It’s just one metric Although net present value is important, it does not reflect the full picture of financial well-being. For example, it does not take into account cash flow, income stability, or future liabilities such as health care costs.
Try instead:
- Evaluate your current net worth as well as how the metric will evolve in the future, especially in retirement and longevity.
- Track net worth along with other financial wellness metrics. Boldin Chart scores you over 15 different measures of financial health, with more added every quarter.
CON: It can be frustrating – For some, especially those who are just starting their financial journey or facing setbacks, a low or negative net worth can be overwhelming. This number does not reflect potential or progress in non-financial areas, such as skill building or career advancement.
- This is one reason why looking at your future net worth is so important. You’re better off taking actions you can take now to do better.
CON: Encourages short-term thinking and poor decision making – One downside of tracking net worth is that it can overly focus your attention on immediate gains or losses, which can lead to impulsive decisions. For example, seeing a decline in your net worth due to market volatility may tempt you to sell investments prematurely, even when sticking to a long-term strategy would be wiser.
Likewise, an obsession with increasing net worth quickly can lead to prioritizing short-term gains, such as hoarding cash or avoiding necessary expenses, over thoughtful, sustainable financial planning. This short-sightedness can derail long-term goals, such as investing in education, health, or quality of life.
- To avoid this pitfall, it’s important to view net worth as part of a larger financial picture, keeping your focus on long-term growth and aligning decisions with your overall goals rather than short-term fluctuations.
Cons: Too much focus on assets – A high net worth is not necessarily a sign of financial freedom. For example, home equity can inflate net worth but is not easily accessible for everyday expenses. Likewise, prioritizing net worth growth may lead to neglecting lifestyle goals or experiences that bring happiness.
- Keep wealth in perspective. Your quality of life should always be a factor in financial decisions.
Negative: Plots all debts as negative – Debt is a powerful tool for building wealth when used wisely. If you own a home and have a mortgage, this housing debt can significantly lower your net worth. However, home ownership has historically been one of the best ways to build long-term wealth.
- Again, it’s important to see your future net worth as well as your situation today to build a complete picture of your financial health.
Keep net worth in perspective
Run your own race
It’s easy to compare your net worth with others. (See average net worth by age.) However, it’s really important to remember that national-level comparisons are completely meaningless. To get a relevant comparison, you’ll need to compare yourself to others in your zip code with similar incomes, home values, goals, and values that match your own.
In some ways, your current net worth is an expression of who you are today. Your expected net worth is an expression of what you want to be.
Just remember that you don’t necessarily need to have a large net worth to be financially secure.
Focus on trends, not perfection
Net worth is most valuable when tracked over time, showing progress and highlighting trends. Don’t worry about fluctuations, as market changes or large purchases can temporarily reduce your net worth without reflecting your overall financial health.
Align net worth with life goals
Use your net worth as a tool to measure progress toward what really matters to you, whether that’s financial independence, buying a home, or retiring comfortably. Your life goals, not random numbers, should guide your financial decisions.
Consider other metrics
Balance net worth with other indicators of financial well-being, such as cash flow, savings rate, and retirement readiness. These metrics provide a more comprehensive view of your financial health.
The Boldin Financial Wellness Score (part of the Boldin Retirement Planner) assesses your financial strengths and weaknesses across more than 15 different financial metrics.
Final thoughts
Tracking your net worth is a useful exercise, but it’s only part of the story. By keeping this metric in perspective and focusing on long-term trends and personal goals, you can use it as a guide without letting it define your financial journey. Remember, wealth is not just about numbers, it is about creating a life that aligns with your values and priorities.
Build and maintain a comprehensive financial plan with the Bouldin Retirement Planner. Track a range of financial health metrics, develop positive financial habits, make stronger financial decisions, and stay on track toward the future you want.
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