There was a time when I was absolutely obsessed with keeping track of my money. I checked all of my account balances daily. I recalculated my net worth on a weekly basis. I meticulously tracked every single expense. I didn’t want to miss out on a dime.
Over time, I mellowed out on this type of tracking. I still follow my finances pretty carefully, but I don’t do the things above, at least not with such fervor.
Don’t get me wrong, I still pay attention. I still want my spending to be low and my net worth to keep going up.
The big change is that I realized it’s not really about the money. Whenever I make a financial decision, what I’m really asking myself is this: is this thing I’m about to spend money on a good use of my life’s energy and time?
Let me show you what I mean. I estimate that for each hour I spend devoted to work-related tasks, I’m probably earning somewhere around $20 that I can actually keep (excluding taxes and other required expenses), so let’s use that as our basis.
If I buy a $40 game, that means I essentially traded two hours’ worth of work for that game. That’s two hours of my time and my mental energy that’s just gone now. In exchange, I have this game. Is that hour really a fair trade for that game? Couldn’t I just play something I already have?
I use that kind of mental exchange all the time, to the point where it’s not even a conscious deliberation. I just instinctively recognize that I’ve sacrificed a bit of my life’s time and energy every time I buy something, particularly something I don’t need, and it coaxes me not to buy.
That doesn’t mean I never buy things. I most certainly do purchase quite a few things just for personal enjoyment, but I’m aware that it’s not a net positive. I’m giving up something real – my time and energy – to have that thing, so I only want to do it when it’s actually worth it.
Gum at the gas station? Not worth it. A magazine in the checkout aisle? Not worth it.
On the other hand, materials for an amazing dinner for my family might very well be worth it. A game that I know I’ll play over and over with my friends might very well be worth it, too.
This just scratches the surface. This type of thinking goes much deeper. Let me walk you through a bit of this mindset.
A person’s net worth is pretty easy to calculate. Just add up the value of all of your assets – in other words, figure up how much cash you would have if you emptied out all of your accounts and sold off all of your property. Subtract from that all of your debts. The resultant number is your net worth.
Naturally, we all want a nice, healthy net worth. A nice net worth is a reasonably good symbol of financial success, right?
I look at my net worth in terms of years of freedom. All I did was figure out how much I would need to have on hand to spend a year perfectly happy without doing any work at all – I calculated a number around $35,000 a year to cover my family. Then, I take my net worth and divide it by that number. So, if my net worth is $700,000, my net worth represents 20 years of freedom. Twenty years from when I can reasonably expect my natural life to end, I plan on just walking away from “work” in the traditional sense.
That doesn’t mean, of course, that I won’t actually work at that point. I have a number of big projects I look forward to devoting big parts of my day to when that time comes – writing a novel, launching a charity where I take no income, and so on.
Change in Net Worth
Similarly, we all want to see a positive change in net worth. A positive change in one’s net worth means that your wealth is building over the past quarter or the past year.
I look at my change in net worth as freedom gained. Since I figure that I need $35,000 a year to live, I just divide my net worth change by that $35,000 and see what fraction of a year of freedom my good choices have earned me. If my net worth goes up by $52,500 over the course of a year, that means my efforts have earned me a year and a half of freedom over the course of that year. That’s amazing.
That change in net worth also shows me whether or not I’m making good decisions in terms of the long run of my life. I can look at that change and compare that to the joy I get out of day to day life as I live it right now. Is that extra year and a half of financial independence worth the choices I made over the past year? I’ll break it down into smaller chunks, too – I’ll look at just the last month.
I have the power to choose between short-term blessings in my life and days and months and years of financial freedom down the road. My life is really about balancing that, and my change in net worth shows me what that balance looks like over the past month or the past year. With some reflection, I can make up my own mind whether I like that balance I’ve achieved, whether I can do more to ensure a financially free future, or I can make other choices to enjoy other opportunities today.
An emergency fund is a pile of cash that you keep either in the local bank or in your house. That cash is there for one reason and one reason alone – big unexpected emergencies that you can’t easily handle. I look at events like job loss, serious illness, emergency travel, and identity theft as reasons for having an emergency fund.
I look at an emergency fund purely as a buffer against worry. I could lose my job or get seriously ill or watch the transmission fail in our car and it’s going to be just fine. There’s nothing to worry about. I could get my identity stolen, too, and as long as that pool of cash is sitting there, I can live through a few months where banks won’t issue me credit.
When I see my emergency fund, I see personal relief. I see low stress. I see security, not just for myself, but for my children. I see that I don’t have to panic about how I’ll be able to afford to take my son to the doctor if he needs care. I see that I don’t have to break down in tears if I hit a deer on a lonely road late at night.
What about investments? Investments represent money that you’ve put to work on your behalf. Ideally, they’re earning a return for you over time.
I look at investment income as a big high five from my past self, even more than net worth growth. I feel really proud of investment income because every dime of it was earned by my personal choice in the past.
Whenever investment income arrives in my accounts, I think of my past self. I think of all of the joys that I’ve had in my life, and I also think of the challenges I’ve faced. I don’t feel as though I’ve really missed out on anything too much in life, looking back, and I’m glad that my past self felt the same way.
Investment income truly represents how you made good choices when you were younger and how those good choices are benefiting you now. If I earn $3,000 in investment income over the course of a year, I’ll divide that by my expected annual expenses and think to myself that because I made a lot of good choices when I was younger, I just received an extra month of financial freedom dropped into my lap out of the clear blue sky.
I owe a lot of thanks today to the wise choices I made in the past, and those smart choices motivate me to keep making them today. I don’t need stuff to have a really good life right now, and by not choosing stuff, I ensure a really good life tomorrow.
In the end, the dollars and cents really don’t matter. They’re just a reflection of the details of my life. When they sit there in my accounts, they represent the hours of time and energy I’ve already used up in my life. I want those hours to have meant something. I want those hours to have bought me freedom, to have brought me closer to the big dreams I have.
When the balance builds, I don’t see dollars building up. I see that dream of financial freedom moving closer. I actually visualize the months adding on to the end of my life, pushing earlier and earlier toward me as I move forward throughout my life. It’s like two people building a tunnel – I’m digging forward with my everyday choices, and my past and future selves are digging backward toward me from the end of my life, fueled by my investment decisions. We’re going to meet in the middle, hopefully someday soon, and at that point I’ll have the financial freedom I dream of.
It’s not about the dollars. If it were, I wouldn’t be doing this. It’s about the life I want – and it’s about the life you want. The dollars are just a translation tool, allowing you to turn your energy and effort and time into that dream.