For the last several years, I’ve done a personal “year in review” within a few days of the turning of the calendar. I sit down and try to assess, as clearly as I can, where I was a year ago, where I am now, and what I’ve improved.
In short, I always try to answer the question of whether I’m better off now than I was a year ago.
I look at that question through a lot of different lenses. How is my health? How is my spiritual life? How is my marriage and the state of parenthood? Have I learned new things? Have I built new skills? Have I built new relationships and strengthened old ones?
Naturally, one area that I focus on is my finances. Are my finances in a better state now than they were one year ago?
The reason for asking myself these questions is to make sure that I’m not merely jogging in place. I want to improve my life in as many dimensions as possible. However, it’s often really hard to assess whether your life is improving over the course of a day or a week or even a month.
A year is a much better period to evaluate whether the little choices you make every day are really adding up to something.
So, how do I evaluate my finances in this way? How can I assess whether we’re better off now than we were a year ago?
Since 2006, I’ve been using our family’s net worth at the end of the year for this comparison. Calculating net worth is simple – you just add up the value of all of your assets (your savings account, your home, your car values, your retirement accounts, etc.) and then subtract from that all of your debts (your credit cards, your mortgage, your student loans, your car loans, etc.). The number left over is your net worth.
During your professional life, your net worth should be going up each year. If you’re not retired, calculate your net worth right now and then compare that to your net worth a year from now. Those numbers should be heading in a positive direction as time goes on. If it’s not going up, you need to seriously reassess what you’re doing with your money.
On the other hand, if you’re retired, you should be focused on making sure your net worth is at least holding its own. Big gains likely aren’t realistic at that point as you’re not earning significant income, but it shouldn’t be dropping through the floor, either.
So, I expect that my net worth goes up each year. What else do I look for?
I want the amount that my net worth has gone up to improve each year. Think about it. If I manage to increase my earnings, eliminate debt, or have a positive return on my investments, my net worth should have increased more over this past year than the year before it.
I do not want the debt portion of my net worth to ever go up. Right now, it’s at zero. I never, ever want to see it higher than that, ever again. I experienced the misery of having debts. It’s not something I want to experience again.
I want to see more income streams than the year before. This isn’t directly part of calculating net worth, but it is related.
An income stream refers to a distinct source of income. Your job is one, but, ideally, you have others. If you have a website or some YouTube videos, that’s another income stream. If you have a side business, that’s another one. If you’ve written a book, that provides yet another income stream. There are lots of income streams out there.
Many income streams require a bunch of effort up front without any income, but then slowly generate income for you over a long period without a lot of additional effort. For example, if you write a book, you won’t make anything while writing it, but once it’s in print, you’re going to earn a royalty check from it every so often even if it only sells a few copies.
I try to build a few of these each year so that I have small amounts coming in from lots of sources. That way, if one of them dries up, I can still rely on the others for income in the future.
If I pass all of these checks – and, this year, I did – I can view the past year as a success. I also have ideas in mind for what to do for the coming year to make sure that the positive trends continue.