Can tracking your net worth make you rich? Why yes. Yes it can.

Do you know your net worth? A recent study conducted by global consulting firm Deloitte found the average millennials’ net worth to be just $8,000. That’s a 34% decline since 1996.

High cost of living, student debt, and being unemployed or underemployed is no doubt the culprit. But despite all of the setbacks, there are a number of wealth-building strategies one can employ.

The first one, which we cover here, is incredibly simple. In order to know where you want to be, you must first know where you are.

If there is one thing that separates those with great financial health and those with poor financial health, it’s the ability to properly track progress on financial goals.

In other words, tracking your money is absolutely vital to building long-lasting wealth and living a financially free lifestyle.

But what is the makeup of one’s net worth? How do you calculate it, and why is it important to regularly track? In this ultimate guide, we break down the answers to these common questions. If you’re ready to get your money in order and start with the basics of your personal financial journey, here’s what you need to know:

The Basics to Understanding Net Worth

Knowing what your net worth is allows you to properly align your financial goals with your current financial scenario. Understanding it will not only give you a general understanding of your financial health, but also allow you to better understand multiple financial concepts associated with your personal finances.

What Is Net Worth?

In order to properly understand what net worth is, let’s take a look at a few official definitions of the concept:

BankRate.com: Net worth is the value of all assets, minus the total of all liabilities. Put another way, net worth is what is owned minus what is owed.

Wikipedia.org: Net worth is the value of all the non-financial and financial assets owned by an institutional unit or sector minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net worth can also be conveniently expressed as non-financial assets plus net financial assets. Net worth can apply to companies, individuals, governments or economic sectors such as the sector of financial corporations or to entire countries.

Investopedia.com: Net worth is a quantitative concept that measures the value of an entity and can be applicable to individuals, corporations, sectors and even countries. Simply stated, net worth is the difference between assets and liabilities. Positive net worth means that assets exceed liabilities while negative net worth describes the opposite scenario.

An asset is anything that has value. This could be real estate, your personal possessions, cash, investments, gold, and anything else that has a monetary value.

A liability is, in most cases, a debt owed to someone. It can also be anything that costs you money to maintain and ultimately decreases your total net worth. Examples of liabilities are debt such as a mortgage, credit cards, personal loans, and physical property that decreases in value or costs money to maintain.

Now, enough with the financial jargon and boring definitions. Let’s get down to the English version of what the meaning of net worth is. Taking into consideration the above definitions, we could define it in these simple terms:

Our Definition of Net Worth: If you were to sell all your personal items for cash, and then pay off all your debts, your net worth is how much money you would have left over.  Your net worth can be a positive or negative number. It is the total cash value of all your belongings minus all your debts.

How Your Net Worth Is Calculated

Calculating your net worth is actually pretty easy.  To start, follow this 4-step process:

1. Make a list of all your cash, investments, retirement savings, bank account balances and other investments.  Add up the total balance of each of these accounts.
2. Make a list of all your personal items worth over $100.  This includes things as large as the value of your house, your car and even things as small as your electronics worth over $100.  Add up the total value of your personal items.
3. Make a list of all your debts.  This includes any bank loans, student loans, mortgages, car loans, and credit cards. Add up the total balances of each debt for a total value.
4. Add the totals from step one and step two for a total value of all your “Assets.”
5. Step 3’s total is your total value of liabilities.  Subtract the total value in step three, from the total value in step four.  In other words, subtract all your liabilities from all your assets.

The answer is your total net worth.

Here’s a quick equation for those visual learners:

• Total Assets (anything with monetary value) – Total Liabilities (all debts) = Your Total Net Worth

Example: Net Worth Calculation

John and Jane are ages 35 and 34 years old. They own the following assets and liabilities:

To calculate John and Jane’s total net worth, we need to subtract their liabilities from their assets, using the information from the table above.

– $570,000 (Total Assets) – $410,000 (Total Liabilities) = $160,000 Total Net Worth

How does this information help John and Jane? Let’s assume they have a goal to save more money for retirement. How can they free up some extra money to contribute towards retirement? Some viable options might be to pay off debt to free up some monthly debt payment obligations.

Or, perhaps they decide to sell their cars and downgrade to a car with a lower car loan and thus a lower monthly payment. Either way, knowing their net worth helps them make an appropriate plan to achieve their financial goals.

7 Reasons Why You Should Be Tracking Your Money

Here are 10 more benefits of getting your finances in order and tracking your money :

1.     You Will Know What to Do Next

Knowing your net worth is like having a map to get to a destination. If you don’t know where your destination is and where you currently are, how are you supposed to plan on how to get there? Regularly tracking your money will be enough effort to naturally increase your total wealth regardless of your financial goals.

2.   You Will Have a  Plan for Retirement

Did you know that if you plan today expecting to live on just a $50,000 income, you need to have at least $1,250,000 saved? If you retire in 30 years and inflation is 3% on average, your retirement savings for a $50,000 income jumps to over $3,000,000.  If that number doesn’t scare you or motivate you to track your money, I’m not sure what will! Otherwise you’ll be working for the rest of your life.

3.    You Will Avoid Common Financial Mistakes

Perhaps you’ve heard the phrase “out of sight, out of mind…”? Naturally, if we don’t see it, we often forget about it.  Not calculating your total net worth can have similar consequences of not understanding how bad (or, hopefully how good), your financial health really is. Financial planning, it eliminates the risk of allowing your financial health to get worth, because you are regularly tracking your money!

4.     You Will Be Prepared for The Future

Calculating your net worth is just one piece of the puzzle when it comes to budgeting.  Knowing what you have and what you owe allows you to calculate what you can afford. Furthermore, you can plan for future events such as weddings, large purchases like a house, education, vacations, etc.

5.    You Can Achieve Financial Freedom

Financial freedom means you have enough money to choose whether you want to work or not.  If you no longer have a need to work a regular full-time job because you have enough money to take care of your living expenses, you have achieved financial freedom.  Tracking your money allows you to plan for and properly adjust your finances to achieve this great milestone.

6.    You Will Find Happiness 

They say money can’t buy happiness.  While that is true to an extent, it’s also true that money is one of the number one causes of stress among families today.  In fact, when it comes to marriages (for example), it’s the number two reason that people end up divorced! Keeping track of your finances gives you the peace of mind that your finances are in order, and that you’re in control of where your finances are headed.

7.    You Can Help More People

When you’ve mastered your finances and regularly track where your money is going, before you know it, you’ll find real wealth. And as your wealth grows, you will have the ability to extend a helping hand to others. This could be monetary help, giving of your time, and even providing your resources to help contribute to a cause you strongly believe in.

Tools To Track Your Net Worth

Imagine a life where you know exactly where every dollar you own is allocated.  You know exactly how much money you need to save in order to start that business you’ve always dreamed of or how well your passive income streams are doing.

If you love to keep things simple, open up an Excel sheet and start writing things down. But if you want a more advanced approach, Personal Capital is one of the best money trackers on the market. With it, you’ll be able to auto-track your income and expenses. And keep every aspect of your financial like in one place.

Strategies For Building Your Wealth

Now that you know where you stand financially, you’re probably ready to start growing your wealth. The first step is to create what some would call an emergency fund. I, on the other hand, like to call it a freedom fund. With it, you’ll have the freedom to say “F-U” to anything that doesn’t align with who you are.

To create this freedom fund, you’ll want to use a high-interest savings account. A few great ones include CIT Bank and BBVA. Both often have interest rates above and beyond regular banks.

Next, you’ll want to grow your income. Maybe you want to create a passive income stream, start a business, land a new job, or take an online class that will help you command more money. Whether you choose one or all of these things, you’re already on your way to a life filled with freedom.

This article first appeared on Capitola Standard.