Handling Negative Net Worth

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The first time I calculated our family’s combined net worth, it was negative. And it hurt.

At that time, we lived in an apartment. Our only significant assets were our two cars, which we had loans on. We also had student loans, plus ample credit card debt.

When you add up those assets and subtract those debts … you don’t get a happy result.

A lot of people freshly out of college face this same difficulty, though, and it’s disheartening. If you think about your situation in the world and realize that if you sold off every single possession you own and you’d still be in debt, it feels hopeless.

When I was in that very situation, a few things helped make it tolerable.

First, I focused almost entirely on my forward progress, not the overall total. Rather than thinking about the fact that my net worth was -$20,000, I focused instead on the fact that my net worth went up by $1,000 over the last month.

This required me to calculate my net worth on a regular basis and compare it to previous calculations, something I still do. I find that my previous situations provide the most powerful comparison for my current financial state.

With that change in the number I focused on came a change in approach to my finances. Since I was deeply concerned about maximizing the change from month to month, I began to heavily focus on frugality.

Making moves that directly reduced my spending produced a dramatic positive impact on my monthly improvement.

The money saved from frugal moves was largely tossed toward extra debt payments. As the balance of the debts went down, more and more of my monthly debt payment went toward the balance rather than toward interest, which meant that I was pretty consistently improving my “monthly net worth change,” which was the only number I was really focusing on.

After a while, “beating” my previous record for change became a goal each month. If our net worth went up by $2,500 last month, then I wanted to beat that over the following month. If I managed to do that, then I had a new record – if I didn’t, I wouldn’t beat myself up, but I’d look hard for reasons why.

What I found was that, once I locked onto this approach, I didn’t really have any motivation to do it differently, even when my net worth went into the positive category (which it did about six months later).

In fact, I still use the change in our financial situation as the primary measure of our success. I mostly compare things to how they were a quarter ago and a year ago and I’ve started adjusting things a bit based on the fluctuations of the stock market (as the ups and downs of the S&P 500 now have more impact on the actual numbers than any real moves I make).

If your net worth is negative, don’t get disheartened. Instead, focus on the positive change you’re making to it each month. Make that number your focus and strive to increase that number each month. If you do that, your net worth will naturally follow.

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