Keep Track of Your Progress (8/365)

One of the best personal finance tasks I ever took on was building a personal net worth calculator.

It was a simple little thing (in fact, I wrote a tutorial on how to build one in any spreadsheet program you have, very little knowledge required). All it did was add up all of my assets, add up all of my debts, then subtract my debts from my assets, leaving me my net worth.

The spreadsheet simply consisted of a list of all of our significant assets – our retirement accounts, our checking accounts, our savings accounts, our vehicles, our home – and their approximate values. It would also include each of our debts – credit cards, car loans, mortgages, and so on – and their current balances.

All I had to do was enter the new balances and values for each of these things at the start of the month, and the spreadsheet would automatically calculate my total assets, my total debts, my new net worth, and how each of these numbers compared to the previous month and to the previous year.

For years, I did this diligently every single month. It almost became a ritual for me. I’d open up that spreadsheet, gather up all of my information, and then either revel or despair in the results.

It was an enlightening and valuable experience.

Keep Track of Your Progress (8/365)

Why was this so worthwhile for me?

First of all, the whole process gave me an incredible amount of motivation. Each month, I felt strongly motivated to make sure that my net worth went up. It was a very simple way to check whether or not I was truly living by the “spend less than you earn” mantra. If my net worth went up, then I was spending less than I earned. When that happened, it felt good. It felt like I was making good decisions in my life.

The change in net worth became a big driving factor in my day-to-day decisions. I would often use that number as a motivator to make lots of little choices throughout the month. I would choose not to stop at the bookstore, for example, because I would tell myself that it would hurt my progress with that number.

Perhaps just as important, the numbers would clearly tell me if I wasn’t following a good financial path. If I didn’t see an increase like I expected, or if I saw a net worth decline, I knew I had to shape things up.

Numbers don’t lie. If your net worth goes up over a given period, particularly if you don’t have a large amount of money invested, then you were making good financial choices during that period. If it goes down, then you were perhaps making poor financial choices during that period. At the very least, a decline means that you need to look into the reasons for that decline and likely make some changes.

Avoiding the numbers is a mistake. If you choose to trust your instincts or your gut feelings when it comes to your finances, you’re almost always going to find yourself bitten by those instincts. It’s incredibly easy to overlook and forget about little things along the way. When you rely on the numbers, the little things don’t just disappear on you.

Eventually, I reached the point where the ups and downs in my retirement savings and my children’s college savings were having more of an impact on my net worth than any of my personal choices, so the routine became less important. Over the years, though, the process instilled in me a great deal of accountability about the power of the little decisions I make every day.

If you’re struggling to get your finances in order, start making yourself accountable. A simple net worth calculator is a great place to start.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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  1. Johanna says:

    Once again, the picture doesn’t match the article. The article is about keeping track of net worth, but the picture shows someone keeping track of expenses.

    And I’d think that for someone who’s really just getting started, it would be better to set up a system where it’s not possible to spend more than you earn, rather than relying on the motivating power of the despair you (might) feel when your net worth goes down. Figure out how much you can afford to spend each month on non-fixed expenses, and once you’ve spent that much, stop spending – making an exception only for true emergencies that threaten your health or safety.

  2. valleycat1 says:

    What I don’t like about using a net worth snapshot to check my progress short-term is that sometimes things happen to the value of my assets that’s out of my control (housing bubble burst, stock market ups & downs) that could result in a huge decline or increase in the bottom line.

  3. Lesley says:

    Using net worth as a financial gauge when you’re just starting out and might have a huge debt burden (student loans, for example), is just depressing and disheartening. If you have no assets, what’s the point? You already know you have debt.

  4. Johanna says:

    @valleycat: To be fair, Trent does mention that this technique works less well when you have a lot of money invested in things like stocks.

    But I think that if you have any money at all (even just a few hundred dollars) invested in stocks or other assets whose values fluctuate a lot, tracking your net worth too frequently can cause you to stress too much about short-term fluctuations in asset values, and can lead to bad investing decisions as a result.

  5. LaDonna says:

    On the other hand, folks, it might show you that things aren’t really as bad as you might think. At least that’s how it worked for me. Of course, I used Mint.com’s net worth feature, but same diff. When I got everything input, I was happily (or at least not badly) surprised to find my net worth was at least in the black, if not by much. I’d thought for sure we were in the red. So that actually gave me hope.

    To be fair, I certainly don’t track it closely, so it wasn’t a massive motivational tool for me. But if it works for others, cool.

  6. Other Jonathan says:

    Johanna, recall that not all advice will work for everyone – obviously. Trent didn’t say this was great for everyone, he said it helped him and that it’s a good place to start – which for many people, it would be.

    I have held off writing this forever, but your consistent negativity on just about every single post on this site is really annoying. If a suggestion doesn’t work for you, fine. Move on, and let those who get value from the post enjoy it.

  7. Troy says:

    In Johanna’s defense, the same ‘move on’ suggestion applies to both the comments, and those who disagree with said comments.

    This is a professional blog. Thousands of posts and milliuons of page views.

    Criticism is both necessary and unfortunately required at times.

    The little mistakes that keep being made get tiresome.

  8. imogene says:

    Teddy Roosevelt said it best:

    “…the man who really counts in the world is the doer, not the mere critic-the man who actually does the work, even if roughly and imperfectly, not the man who only talks or writes about how it ought to be done.” (1891)

    “Criticism is necessary and useful; it is often indispensable; but it can never take the place of action, or be even a poor substitute for it. The function of the mere critic is of very subordinate usefulness. It is the doer of deeds who actually counts in the battle for life, and not the man who looks on and says how the fight ought to be fought, without himself sharing the stress and the danger.” (1894)

    Trent and Brittany, I appreciate the work you do.

  9. Squirrelers says:

    I think it’s important to keep track of net worth. It’s possible to do it too often, and be counterproductive in that way. But periodically checking net worth is kind of like a ball player pointing up at the scoreboard – it shows where things stand, regardless of effort or intended effort.

  10. Other Jonathan says:

    Troy, yes, you’re right when it comes to correcting mistakes (which Johanna does very well in the reader questions posts). It’s the constant criticism of posts that are beneficial to many people seemingly because they aren’t going to beneficial to all people that gets to me.

  11. Johanna says:

    @Other Jonathan: First of all, I’m not criticizing this post for not being beneficial to all people – and I’m certainly not criticizing it for not being beneficial to me. If that’s what you think I was saying, maybe you should have held off on your oh-so-important comment a bit longer and read my comments a bit more closely.

    As Riki said the other day, I’m not here because Trent dispenses some kind of magical wisdom. (And if that’s why you’re here, maybe you’re the one who should move on, because there are so many better sources of wisdom out there.) I’m here because the comment threads often contain interesting exchanges of ideas, when people share their own experiences and advice that might be different from Trent’s.

    If you (or if anyone) want to criticize my comments the same way as I criticize Trent’s posts, please do. If I’ve made a factual mistake, please correct it. If I’ve overstated an argument or overlooked something, point that out. If I’ve said something unintentionally offensive, let me know. But if you don’t have anything to add along any of those lines, what exactly are you hoping to accomplish by telling me to shut up?

  12. Catherine says:

    Trent – I have been using my net worth spreadsheet since August 2007 and it has been a great way to gauge if I’m on task or not. Thanks again for the great tutorial & for revisiting the reasoning behind it today. :-)
    I am at a point where a lot of my ups and downs are due to stock market (lots of my Roth IRA is in Total Stock & Windsor II at Vanguard), but in general I like seeing the big picture with all the numbers in one place.

  13. Johanna says:

    @imogene: I enjoyed those quotes. Thank you for sharing them.

    In this case, though, there’s really not much of a difference between the “doer” and the “critic” – we’re all just babbling on the internet. True, Trent has the burden, which the rest of us don’t, of coming up with stuff to write about in the first place. But he’s also the only one here getting paid, so that seems fair.

  14. AnnJo says:

    For someone starting out on a financial turn-around, I think including market-variable assets (like a house, a stock-bond portfolio, commodities) in a monthly net-worth calculation is going to be of limited utility. If the purpose is to motivate and show progress toward financial stability, it makes more sense to keep track monthly of current assets and liabilities, possibly adding to the calculation as a current liability the annual amount of desired contribution to a retirement or long-term investment account and the annual goal of desired principal pay-down on a mortgage, shifting those to the current asset column as they are met.

    That sounds confusing but here’s an example of what I mean:

    Current assets:

    Checking account
    Savings account
    Emergency fund
    Funded contribution to IRA year-to-date (YTD)
    YTD increase in home equity due to mortgage pay-down

    Current liabilities:

    Credit cards
    Student loans
    Car loan
    Yearly IRA contribution goal
    Yearly goal on mortgage pay-down

    Say your goal is to contribute $5000 to an IRA this year. The year would start with a $5000 liability and zero in the current asset funded IRA, and as you make a contribution, it would decrease your liability and increase your asset.

    This would give you a much clearer picture of how well you’re doing in meeting your goals and improving your situation. (And, by the way, I am aware that calling this a Net Worth calculation would be highly misleading in accounting terms.)

    The full-blown net worth is probably only worth doing once or twice a year, obviously omitting these “made-up” categories.

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