How to respond to a drop in net worth

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How to respond to a drop in net worth

Household net worth fell by $3.7 trillion at the end of 2018 according to the Federal Reserve. It was the biggest drop since the financial crisis, as multiple news outlets reported. It sounds scary. But you shouldn't panic, said Dana Anspach, founder and CEO of Sensible Money, a financial planning firm.

The Federal Reserve measures household net worth by adding up the assets owned by American families and nonprofits, including investments and real estate, and subtracting their debts.

Much of the decrease resulted from a drop in the stock market. Three months into 2019, the market has mostly recovered.

"It's just a temporary measure," Anspach said. "It's only relevant if you needed to sell or consume those assets at that point in time."

Here's how you should respond to a drop in net worth.

Figure out the cause

First, determine whether the drop is because of actions you've taken or, as was the case at the end of 2018, temporary market forces, Anspach said. If your net worth falls for one quarter but you're still saving money up and paying debt down, there's no need to change course. But if you're the cause of the drop, maybe because you're borrowing more money and dipping into your savings accounts, it's time to pay attention.

Without understanding the reasons behind a change in net worth, people can sometimes react too quickly and do more damage, said Karl Leonard Hicks, a certified financial planner. That's why it's important to understand what makes up your net worth before responding to a news report about it.

How to calculate your net worth

Your net worth comprises everything you own minus everything you owe. Add up all the value of all your assets, from bank accounts to investments to real estate, and subtract the value of your debts. You can use a tool as simple as a spreadsheet, as Anspach does.

Anspach updates the balances in the spreadsheet every quarter. Any time she opens a new account, she adds it.

Hicks provides an annual net worth statement to his clients. It's a long-term measure, and some factors, like the stock market or the value of your home, are out of your hands.

"Only focus on the areas where you actually have control: your debt and building up your investments and your savings," he said.

We made the simple spreadsheet below (you can also download it) to help you track your net worth. Enter your own assets and liabilities into our template to calculate how you're doing every month.

How to increase your net worth

Managing your debt is a great place to start, Hicks said. Taking the time to calculate your net worth can give you an idea of how much you owe, to whom, and what interest rate you're paying. From there, you can decide how to pay it off. Taking these easy steps can help you pay off your debt in 30 days or less.

The other way to boost your net worth is to increase how much you save and invest, Hicks said. Contribute as much as you can to your employer-provided retirement account, especially if they match your contributions. If you've maxed that out, consider opening an individual retirement account. Make sure you're putting money away every month. (Learn how to open an IRA.)

Improving your net worth is largely about mindset. That means not sweating over a quarterly drop in net worth. While her net worth may have fallen, Anspach expects to see a full recovery when she updates her spreadsheet in a few weeks.

"You're focusing on the long-term growth of your worth vs. the short-term fluctuations and on the actions and habits that improve it," Anspach said.

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