How to Benchmark Your Net Worth in 3 Easy Steps

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December 3, 2017

Wealth creation is about more than your investment portfolio.

A better way to measure wealth than just your investment portfolio performance is your net worth, which is simply your assets minus your liabilities. Your assets include things like the money you have in your bank accounts, the value of any investments, and the market value of your home, car and other personal property. Your liabilities are what you owe, which includes your mortgage, student loans and credit-card debt.

Net worth is the culmination all your financial efforts, says Sam Dogen, writer of the popular personal finance blog Financial Samurai. Benchmarking your net worth and tracking changes over time can help you focus on what really matters, he says. Here's how to do it:

Step 1. Determine your net worth.

It's easy to figure out your net worth. You can do the calculation on a spreadsheet, by documenting your assets and liabilities. Or you can use an app like Mint or Personal Capital that will track your net worth automatically.

If you are calculating your net worth with a spreadsheet, you will need to know how much money you have in your checking and savings accounts along with your investment accounts. You'll also need to document the value of your other assets. Zillow can give you a rough estimate of your home's value and the Kelley Blue Book can approximate the value of your cars for free.  You can report your liabilities by listing the exact amounts you owe on your mortgage, student loans, credit cards and other debts.

Step 2. Compare your progress over time.

Once you have calculated your net worth, you can compare your progress over time. Dogen created net worth targets by age, income and work experience to give people guidelines as they save for retirement. His net worth targets are based on hundreds of thousands of reader responses about their net worth, his own experience and income data from the federal government.

Ideally, Dogen recommends you aim for a net worth equal to two times your average income by age 30, 10 times your average income by age 40, 15 times your average income by age 45, and 20 times your average income by age 60.

But what about your cost of living? "It doesn't matter whether you live in Manhattan or Topeka," Dogen says. "If you can achieve a net worth equal to 20 times your average gross income or greater, you'll be financially free [regardless of where you live.]."

His savings recommendations are more aggressive than those from most financial advisors. For example, Fidelity Investments, one of the largest administrators of retirement accounts in the U.S., advises that its clients save at least eight times their ending salary by retirement.

Step 3. Adjust your net worth to reach your goals.

If you find your net worth going down, that's a sign you need to increase your savings, boost your income and pay down debts. Or perhaps all three.

Creating a budget and tracking your spending can help you identify any areas where you could cut expenses. Again, Mint and Personal Capital can help you create a budget easily. Or you can use a spreadsheet.

Setting up automatic contributions for your savings account can make it a breeze to accumulate more money. Two apps can help you automate your savings further:

  • Acorns rounds up to the nearest dollar on every purchase you make with a linked checking account and automatically invests the change into a diversified portfolio for you. You can customize your risk tolerance and adapt your investments based on personal preferences.
  • Digit monitors your spending habits and, when it determines you can safely afford it, transfers a small amount of money (typically between $5 to $50 every few days) from your linked checking account to a Digit savings account.

Saving is only one driver of net worth on the asset side. You also can focus on earning more to increase your assets. Depending on where you are in your career, you might want to take a risk now that can increase your income immediately or over time, whether that's going to grad school, joining a fast-growing startup or seeking that big promotion.

Paying down debt can quickly raise your net worth. If you have student loans, consider refinancing them. (For example, at CommonBond, you could save thousands over the life of your student loans by refinancing them to a lower interest rate.)

Increasing your savings, reducing spending, boosting your income and decreasing debt can help your reach your net worth benchmarks. "Net worth is a great way to gauge your path toward financial freedom," Dogen says. "If you can accumulate a large enough net worth, then you can break free to do whatever you want."

A version of this story originally appeared in Forbes.com.

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