“The true estimates of your financial intelligence is not how much you make but how much you are able to keep” – Roshawn Watson

We received a positive response on Monday's post: Want to Know Your Net Worth and figured we should have a follow up post, highlighting on the pro’s and con’s of tracking your net worth. For those unfamiliar with the term, your net worth is simply your assets minus your liabilities. You can read here for more information.

Tracking your net worth can certainly have its benefits and unfortunately some limitations, especially when it becomes an obsession.

Benefits of tracking your net worth

It definitely helps you make better financial decisions. Any purchase you make has long-term implications on your net worth, when you take out a car loan for a vehicle you can’t afford, it becomes a liability rather than an asset. When you fail to pay off the loan, the bank might not only reposes the car but the property you placed as security, to cover up the loan and accumulated interest, in turn diminishing your assets and subsequently lowering your net value.

It also helps you identify your weakness. If your net worth is constantly going down it could be attributed to either an increase in debts or a reduction in assets.

It could also serve as a motivation to work towards a goal such as paying off a debt or savings. When tracking your net worth and you notice that your liabilities’ are reducing, it will motivate you to further work towards reducing them.

Weaknesses of tracking your net worth

Your net worth is part of statistics concerning your financial health. A mere glimpse at your net worth will not help identify problems such as lack of liquidity i.e. assets that will bring in cash immediately when sold. Suppose all your assets are relatively ill liquid, it will become difficult to raise cash necessary for an emergency. Maintaining the appropriate level of liquidity is very important and can keep you out of debt.

Frequent tracking of your net worth could also encourage sloppiness especially when you are comparing it to that of people who are broke. You might feel as though you are well off and it might result in temptation to start spending exorbitantly.

Lastly, your net worth is just a snapshot of your financial health. You could be spending yourself into debt, regardless of the numerical value of your net worth. Look at those with quick money, their net worth a year or two before going broke might have be extremely high.

Like any other tool, your net worth has its benefits and limitations. Your self-worth is not limited to your net worth. After all, your net worth is just a number.