A Step Backward

Ever since I started my financial turnaround many years ago, one of my favorite things to do has been to calculate my net worth and compare it to my balance from a month before or from a year before, just to see that I’m still going in the right direction.

Often, it’s hard to see financial improvement in my day to day life because, well, I’m still working every day and my wife is as well. We don’t have enough to retire. At the same time, we have enough put aside that we can handle almost any emergency life might throw at is, including a big job loss. Our money stress is low and there’s not much that could change to make it lower.

So, looking at numbers is often the only way I have to make sure we’re still marching toward our biggest goals – retiring early, paying for a significant part of our children’s educations, and so on.

Are we still moving toward our goals?

I track this in a number of ways. I look at our net worth (our total assets minus our total debts). I look at our retirement account balances. I look at our 529 account balances. I used to look at our debts before we paid them all off. I want to see positive growth in all of those things.

As much as I’d like to say that every month is a step forward, the truth is that it’s not. There are months where, for a wide variety of reasons, our net worth actually went down rather than up.

Even now, when I know that such months are a normal thing sometimes (and this can even be true over the course of a quarter or even a year), it is still frustrating and disheartening. It can feel like we’re taking a big step back in our financial journey, even when we’re putting in the constant effort to keep moving forward and to keep our lifestyle from inflating and to say no to any number of things we might enjoy for a brief while at an unnecessary expense.

How can that happen?

A big expense of some kind. Last year, we replaced a vehicle, moving from a 2004 Honda Pilot to a 2014 Toyota Sienna. We paid for it out of pocket, but our net worth still took a significant hit. We also did some remodeling of our home in order to give each child their own bedroom and provide sleeping accommodations for handicapped guests in our home. Again, while that may have provided a small increase in our home’s value, the cost of the project as a whole absolutely did not pay for itself.

A bad month/quarter/year for investments. This becomes more and more true over time as a person has more and more of their net worth in investments that can potentially be volatile. If you have most of your net worth wrapped up in stock investments, for example, a downturn in the stock market can easily cause more short term losses than you can make up with your income.

Falling back into bad spending habits. Let’s say that Sarah and I just splurge like crazy for a month and we end up spending more than we bring in. We haven’t done so in a long time (except for perhaps one month when we were traveling a ton a year or two ago), but it can potentially happen. This is probably the worst reason, as it indicates a failure of something I can control, whereas the others are largely outside of my control.

Some combination of the above. Sometimes, these things bunch up together to create a seriously difficult month. An unexpected event occurs at the same time as a stock market dive or at the same time as a bad spending month.

Each of these issues has a different strategy that helps.

First, if you have a big expense of some kind and it’s a known and planned-for expense, don’t include the money you’re saving for that big expense in your normal net worth. This is a lesson I learned over time. If I know a big expense is coming up, I start saving for it, but I don’t include the savings account I’m using for those savings in my net worth. Instead, the money going out is just a normal monthly expense, like paying the electric bill.

I have a savings account I use solely for known upcoming expenses. I save for things like property taxes and annual insurance bills and for replacement cars. This keeps known big expenses from causing my net worth to dive.

Second, if you consistently have big expenses that are unexpected that cause your net worth to drop, don’t include your emergency fund in your net worth. This is a good pairing with the above strategy. If you regularly have unplanned expenses that exceed what you can handle and you’re tapping your emergency fund for them, that means you’ve got very uneven expenses and thus you should consider your emergency fund as more of a tool for “evening things out,” and thus you shouldn’t include your emergency fund as part of your net worth.

Third, if investment volatility is really bothering you, focus instead on how much you added to your investments this month, not the return on that investment. In other words, if there’s a month where your investments go down in value, just ignore that drop for the month. It’s not something you can really control at all. Rather, focus on the contributions that you made. You bought more shares, which means that when their value does go up, you’ll improve even faster.

This is the hardest element to just write out of your net worth calculations, but it’s also the easiest one to recognize, so I don’t really let it bother me too much. If I see my net worth dropped during a month with an investment drop, I basically ignore it.

Fourth, if you’re concerned that your spending is going up, focus solely on your budget, not your net worth. Look at how much money came in via your paychecks, and how much money went out via your expenses. Ideally, you should have spent a lot less than you earned, especially if you cut out things like big unexpected expenses and big planned expenses, as noted above.

I calculate this by looking solely at our family income minus the bills we paid, any expenses taken out via a debit card, and any expenses put on a credit card. That number should still be a solid positive. If it’s not, then there’s a real problem with spending that needs to be addressed. If it’s positive but not as big as I’d like, there’s still a problem with spending.

What if there are multiple factors at work? In general, whenever it looks like my net worth has gone down for a month, I look at all of these factors, regardless of the one that seems like it might have the most impact. I’ll stop and look at my budget – take-home income minus actual spending – at any point when I suspect things aren’t right.

What if you feel like a failure? Sometimes, when you have a bad month, you’ll walk away from it feeling like you seriously failed. You’ve made all this progress, only to take steps backward?

Here are a few things to remember if you find yourself feeling that way.

First, recognize that the path to financial success is not a straight line; it’s a zig-zagging trail with some segments that actually go away from the goal for a bit. There is no big financial goal in life that anyone just walks toward in a straight line. Your progress will not be perfectly steady; sometimes, there will be steps backward. That’s okay. This is true for everyone with a big goal of almost any kind, but particularly a financial goal where so many things can make you take a temporary step back.

Second, most of the things that cause you to take a step backward are out of your control. You can’t control unexpected events. You can’t control catastrophes. You can’t control sudden drops in the stock market. They happen. They’re not your fault. There’s no use in getting overly upset by them. Rather, you should view them as things you can handle because you prepared for them (in the case of unplanned or planned expenses) or as opportunities because of a downshift in the market, meaning you’re able to buy more shares this month because the share price is cheaper.

Third, if this does point you toward a spending issue, it’s better off to notice it now and start taking action than to not notice it until it becomes a serious problem. It is far better to notice the molehill than to ignore it until it becomes a mountain. Sure, the molehill is annoying and it does take some effort to get rid of the mole, but it’s a lot better than dealing with huge issues. This is a sign that you should fix things now before they become really problematic, and that, again, is a good thing.

Furthermore, many people go through periods where they really struggle with their spending. People discover new hobbies or undergo life changes or simply drift into more expensive habits. It happens. What is most important for your financial success is that you notice it, you evaluate what’s most important to you, and you make changes accordingly.

A step backward isn’t the end of the world. What’s most important is that you notice them, that you understand what caused them, and that if it’s something under your control, you take appropriate action in line with what’s really important to you.

Good luck.

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