This piece is part of a series I'm calling Money 101 and is designed for those who might not be as advanced in their personal finance knowledge and experience.
One key to building wealth is to measure it and track our financial progress. Just like there's no way to tell what's happening in a sporting event without a scoreboard, you can't measure your success in wealth building without some sort of tracking.
Income is Wrong
In almost every article written by the mainstream media, "wealth" is used interchangably with "income." While the amount of money you earn each year (income) does have a major impact on whether or not you have the opportunity to accumulate great wealth (and how quickly/how much), the two are far from the same thing.
I believe this mix up occurs for two reasons. The first is ignorance. Most of the people reporting on personal finances know very little about the subject -- at least managing money on a day-in day-out basis. Sure, they might be educated or have read several books on the subject, but they are (generally) not wealthy and as such don't know the ins and outs of how to grow great wealth and track it.
The American public is no better. Most believe that someone making $100,000 a year in income is "rich" while someone making $30,000 a year is "lower-middle-class." But if they knew that the person making $100k spends $125k a year and the "poorer" person spends $25,000 a year, they might think differently. But Americans rarely consider the expense side of the equation (which accounts for the poor state of finances many have.)
The second reason is data availability. Income data is readily accessible in large amounts and thus easy to use in articles and posts. It doesn't make it right, but it's the truth.
True Measure of Wealth
There is one true measure of wealth -- how much you own. It's called "net worth."
Net worth in its simplest form is assets less liabilities. You add up the value of the assets you own: investment accounts, banking accounts, retirement funds, real estate, and the like. Then you subtract every debt you owe: mortgage, car loan, credit card balances, student loans, etc. The difference is called your "net worth". It's the amount you truly own. It tells how "wealthy" you are.
In my opinion, net worth is the single-most important financial measure to track. It not only tells you how much you own, but when looked at over time it lets you know whether your wealth is increasing or decreasing and by how much. It's an accurate and (unfortunately in bad times) ruthless measure of how you're doing in growing your wealth.
As such, it's vital that you measure your net worth on a regular basis.
Tracking Your Net Worth
There are different ways to track your net worth. You can use the old-school method of a simple sheet of paper, a more modern option like a spreadsheet, or an automated selection like Quicken. Which option you choose doesn't really matter. As long as you're consistent, you'll be able to determine if your actions are growing your wealth or not.
Personally, I track mine monthly. Each month in Quicken I update the performance of my investments, put in my income and spending, and run a net worth report. I then record it in a spreadsheet and compare it to the other months of the year as well as my status for the same month the prior year. (I know, this last part is a bit overkill, but I'm that kind of tracker.) Doing this gives me a quick report card on how I'm doing managing my money and highlights where I might need to make changes. In addition, I record my final net worth at the end of each year (and have done so since the early 90's.) That's how I know that my net worth has grown at a compounded annual rate of roughly 14.5% since then.
I used to update my net worth weekly, but that was simply too obsessive -- even for me. In addition, there were too many wild swings (up big one week, down big another) as the market went up and down, big bills were paid, etc. Looking at it only once a month seems to level the swings a bit. As such, this time frame works best for me.
Monthly tracking is probably the most frequent you'd want to monitor your net worth (any more frequently doesn't really give you enough time to see progress.) Others measure their net worth quarterly or twice a year. I recommend that you check it every three months at the very least. Whatever your timeframe, just be sure you review your net worth regularly.
Bottomline: Tracking your net worth (and then responding based on what you find) on some sort of regular schedule is a must for any serious money manager, and doing so is a vital habit in the quest to become wealthy.