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How to Assess Your Financial State Without Frustration or Jealousy
My family has had the wonderful opportunity to visit a lot of remote relatives and friends over the past month or so. We’ve visited their homes, stayed in guest bedrooms, camped in yards, taken meals in their kitchens, and had wonderful conversations that lasted well into the night.
Whenever you visit the home of a friend or loved one, it’s hard not to compare that home to your own on some level. Perhaps the home you’re visiting is bigger, or maybe it’s smaller. Perhaps you like the layout of the visited home, or perhaps you vastly prefer your own home’s layout. No matter what you conclude, though, the truth is that you’re comparing a big aspect of your own financial state to theirs.
We fell into this trap ourselves. We stayed at the home of one of my cousins who has a very large portion of her net worth tied up in her home. She lives in a beautiful large home in the outer Chicago suburbs, one that dwarfs our own home. It was easy to compare this house to our own and feel somewhat inadequate and, perhaps in some ways, a bit jealous. Just a few days later, we visited someone who lived in a small old house that was substantially smaller than our own, giving us the opposite feeling.
In reality, both comparisons were really worthless. Neither one really said very much at all about our true financial health. Seeing that someone else had a larger home with more expensive furnishings didn’t make us financial failures, and seeing that someone else had a smaller home with less expensive furnishings didn’t make us financial successes.
The same thing is true when it comes to cars. I’m still driving a SUV that I bought off of Craigslist almost eight years ago. I’ve kept good care of it, but there are a few little problems cropping up – it needs some shock work done on it, there’s a little patch of rust near the gas port, and the passenger headlight cover needs replaced. It’s definitely an older car at this point.
When I pull up next to someone else’s rusty car, that doesn’t make me a financial success. When I pull up next to a brand new model, that doesn’t make me a financial failure.
Why? The truth is that the financial state of others has almost nothing to do with your own personal financial state. What others do with their money really doesn’t matter at all in regard to whether you’re prepared for emergencies in your life, whether you’re prepared for unexpected unemployment, whether you can provide for your needs and some of your wants, and whether you’re getting ready for retirement.
All of those things are on you. They have nothing to do with what some other person is doing with their money.
Let’s step back for a second and look at that person you know with the fabulous house. Perhaps you look at that house and wish that it was your own house, or you feel guilty because you don’t have that kind of success.
For one, do you have any idea as to what kind of debt load that person is carrying? How big are that person’s monthly mortgage payments? How big is their tax bill? How are they able to afford that and make ends meet?
Perhaps they have a great job. Well, what did they sacrifice to get that job? How many years did they spend in training and education for that job? How much of their life did they spend studying and preparing and networking to have that great job?
Maybe their parents helped pay for it. What kind of family dynamic is that like?
The thing is, no matter what you see on the surface, the underlying realities of the lives of other people are left unseen. You don’t see the struggle to keep the bills paid. You don’t see the career stress. You don’t see the family dynamics. You don’t see the hard choices. You just see the house.
Because that story and that set of hard choices is bound to be substantially different than your own, it’s almost impossible to realistically compare your own situation and your own choices to it. You can’t really judge your own life by the gorgeous house that your cousin has. It doesn’t make any sense. Their entire life follows a different course than your own.
You might be jealous of some aspects of someone else’s life, but it has nothing to do with your financial health whatsoever. Comparing your financial state to someone else’s simply has too many life variables for it to be meaningful in any way. They have invested their life’s energy in far different ways than you have. They have had different opportunities than you. They’ve also had different setbacks than you. They have different interests and different responsibilities than you. A straight comparison means little.
Instead, the best place to make a financial comparison is to your own past. There is no one on earth that is closer to your investment of life energy, opportunities, setbacks, skills, interests, and responsibilities than your past self. Your past self is the best point of comparison you have.
Comparing your current financial state to that of your past usually indicates some form of positive progress. For most people, their financial state is slowly heading in a positive direction once they are finished with schooling. It might not be a rocket ship, but it usually takes the form of steady progress with some hiccups.
Since there’s nothing hidden, you can clearly see the impact of your own good financial moves; it’s hard to see that when you’re comparing yourself to others. All you really have when you compare your financial state to that of your friends are the visible signifiers of wealth. Your car. Your house. Your clothing. Your gadgets. None of those things represent the health of your bank account or the balance of your retirement fund, which are true signifiers of financial health. Remember, a person can have a giant house and still have a negative net worth if they’re up to their eyeballs in mortgage and student loan debt, while a person driving a beater and living in a tiny apartment can be a millionaire.
It’s hard to be jealous of yourself. Many of the negative feelings we feel when we compare ourselves to others simply disappear when we focus on self-comparison. It’s hard to feel jealous of ourselves. We might feel frustrated, but that frustration comes only from a sense of knowing that we can make better choices for ourselves. We can’t feel frustrated about the special advantages that the other person has when that other person is us.
The frustrations you may feel when examining yourself are ones that you can resolve through action. Any time that you do any type of self-evaluation, you’re likely to run into some frustration. You’re not performing as well as you’d like. You don’t have the results you want. That’s okay. The reality is that such frustrations are far easier to manage if you’re comparing to your past self than to others because the one big variable there is your behavior. You can choose to make different choices and you will see different results, because you’re comparing yourself to a version of you that perhaps didn’t make the best choices. In the end, nothing stands in your way but your own choices.
So, the key question here is this: how does a person use themselves as a basis for determining their own financial health?
It’s actually pretty simple. Just go back to the central tenet of personal finance: spend less than you earn. If you are consistently doing that, you are headed in a healthy financial direction, and you can make sure you’re doing that by comparing your current financial state to your past financial state.
How do you make that comparison? There are a number of ways to do it.
Compare your overall debts. Simply add up your debts that you owe right now, then pull out some older statements (say, from six months ago or a year ago) and add up that total, then compare the two. Have you spent the last six months or a year making positive progress on your debts?
Quite often, what you’ll find here is that your large debts, like student loans or a mortgage or a car loan, have seen a drop in balance, while smaller and more flexible debts, like credit card debt, may have gone up and down. Over the course of a longer period of time, though, most people see a gradual decline in their debt load with an occasional big spike when they make a major purchase.
Your goal, if you want to improve your financial health, is to make that steady decline go even faster by focusing on debt repayment, or to make those spikes smaller by saving in advance for upcoming big expenses (like saving up for a car or for a house down payment).
Compare your account balances. In a similar fashion, simply add up the balances of your current savings, checking, investment, and retirement accounts, then go find your older balances and do the same. You can also add in the value of your major assets, like your home and your car. Have you spent the last six months accumulating wealth in a noteworthy fashion?
Again, what most people will find when they do this is that their accounts are slowly rising over time, though their frequently used accounts (their checking account, for example) fluctuates a great deal. This indicates positive progress over time, but is it enough?
Your goal, if you’re seeking to improve your financial health, should be to find ways to increase your contributions to your accounts. Bolster your savings with some extra cash for your emergency fund. Sock away a higher percentage of your income into retirement savings. Those types of moves will see your account balances increase at a faster and faster rate.
Compare your net worth. Of course, you can combine the first two numbers here together to get a picture of your net worth. Simple take the value of all of your accounts and assets and subtract from that the total of your debts. That’s your net worth – how much you’d be left with if you sold everything.
Again, a financially healthy person should see a slow and steady rise in their net worth. Debt reduction can push it forward, as can further contributions to your accounts. Additional efforts in either area will see your net worth begin to accelerate in a positive direction.
Compare your monthly cash flow. A fourth strategy is to look at your monthly cash flow. How much money do you bring in each month? How much money goes “out” each month – meaning how much money is spent? You keep the money, in effect, when you put it into savings or retirement or some other investment meant to return money. Everything else just goes away.
How is this useful? If you have a positive cash flow, then you can actually withstand a reduction in income pretty easily. If you have an enormous positive cash flow, you’ll likely be able to easily handle a sudden career change or other major lifestyle change without skipping a beat. Without much monthly cash flow, you’re walking a tightrope where lifestyle and career shocks can send lots of things tumbling.
Obviously, the better your monthly cash flow, the better off you’re going to be. You can drastically improve that cash flow by paying off debts, cutting back on spending, and contributing more to retirement on a regular basis. Over time, you want your cash flow to be more and more positive.
Compare your total monthly income. Another thing to consider is your total monthly income, which is basically all of the wages, interest, dividends, royalty checks, and other earnings you bring in during a given month. This can be useful if you’re focused on building your career, building a business, or building lots of income streams for you and your family.
Just go through your various accounts and take note of the deposited money in each one. How much pay did you bring in? How much interest? How much in dividends? How much in monthly ad payouts for your website? How much in royalties for your books? How much in Patreon support? Don’t worry about the increase in the value of your assets – if you have 20 shares in a mutual fund and they go up $2 a share, don’t count that $40. Focus instead on income generated by your work or by your previous investments of money, time, and energy.
This is a valuable thing to track when you’re trying to really push your career or get a side business going. It can show you the reality of your progress.
Which number should I use? It really depends on your personal life goals. If you just want an overall assessment of financial health, use your net worth. If you’re focused on accumulating savings for retirement or for other goals, focus on your account balances. If you’re wanting to eliminate your debts, focus on your debt balances. If you’re worried about day-to-day financial stability and planning for major life changes in the near future, track your cash flow. If you’re focused on your career and business growth, keep an eye on your monthly income. Not everyone has the same goals, so not everyone should use the same numbers for tracking.
If you’re unsure what to track, a person’s net worth is a really good single number to track. It’s just the sum of all of your assets minus all of your debts. That number alone is a pretty good indicator of financial health, and when that number grows, you know you’re making financial progress no matter which way you choose to track it. However, there is some “noise” in that number, so if you’re really focused on one area, using a number targeting that area makes far more sense.
The best way to get started is to start recording those numbers right now. You might not necessarily be able to access the older numbers needed to make these calculations today, and that’s okay. What you can do is write down the numbers you want to focus on now and then compare back to them in a few months.
Since you’re just writing down balances, I suggest using a tool like Google Docs or Google Sheets to record those numbers. Simply write down the date and the number that you’re keeping track of. In a few months, do it again, and then compare that fresh number with the older ones. Are you making progress? What can you do to accelerate that progress?
This is how you can fairly assess your financial state. You’re slicing through all of the unfair elements that come with comparing your financial state with other people. You don’t have to account for differences in life history, differences in luck, or anything else. Your comparison point is now you. You can’t be jealous or frustrated with yourself in any destructive way. Instead, you can channel any negative feelings you might have directly into personal change, which is the true key to financial success.
Good luck on your financial journey going forward! May it involve far less stress, frustration, and jealousy than before!