Rule #7: Watch Your Progress – But Make It Fun.

14 money rulesA reader asked me if I could break down my ideas into a handful of principles. After some careful thought, I came up with a list of fourteen basic “rules” that summarize my money and life philosophy. I’ll be presenting these as a weekly series.

One of the first things I did when I started turning my financial situation around is to start keeping track of my net worth over time. Each week (and later each month), I calculated the value of all of my assets, all of my debts, and the difference between the two (my net worth).

Later, when I began to try to improve my physical shape, I started keeping careful track of several metrics: my weight, my resting heartbeat, and the number of miles I was walking and jogging. Even more powerful, I started sharing my walking and running data via the Nike+ website, allowing me to compare my progress with others.

I like to call it the “keeping score” effect. Almost always, it becomes more fun to work towards a difficult goal if you have some sort of method of comparing your progress to the progress of others, or comparing your current state with your state in the past. You can see the improvement clearly – when you look and see that your net worth is up $10,000 compared to last year or you see your average mile is more than a minute faster than it was a couple months ago, it feels enormous. It’s a giant rush.

The entire point here is to keep yourself motivated towards your goals. Keeping score keeps your big goals front and center in your mind. Combining that with a visual reminder of your goal can be particularly powerful, as it keeps your goal front and center in your mind and also demonstrate your progress clearly.

There are countless tools out there to help you keep track of your personal finance progress. I tend to lean towards tools like Wesabe or Open Office or Quicken, which allow you to preserve the security of your account information but require a bit more work. On the other hand, you have tools like Mint, which gathers the information for you but requires you to share all of your account information with one site (which really concerns me from a personal security standpoint, regardless of what Mint’s privacy policy says).

4 Worthwhile Areas to Track Your Progress In

Track your assets.

For me, I only include the assessed value of my home plus the balances of any investment accounts and savings accounts I have. In a normal month, I expect this amount to move up slowly over the previous month, meaning I’m actually saving money. Some months see a precipitous drop, though – for example, if I buy a car, that’s usually a pretty big money hit, since I don’t include my car as part of my assets since they depreciate so much.

Track your debts.

This is key if you’re trying to plow your way through a a debt repayment plan. Each month, you record the balance of each debt, then add them up. If you’re actually pushing well on that debt repayment plan, the total balance of your debts should significantly drop each month. If you don’t see your debt dropping, you need to take a serious look at what’s going on.

Track your net worth.

This one’s simple – just add up your assets and subtract all of your debts from the total. Obviously, each month, you want your net worth to be higher than the previous month. I like to make a note of the difference from month to month and I strive to increase this difference each month.

Track your spending.

Whenever you spend, jot it down. Keep track of all of it and, at the end of the month, add it up. Even more important, divide that spending into categories – utilities, necessary food, eating out, entertainment, books – and total up each category. This technique is powerful because it shows you the areas where your spending is out of control and you need to tighten up.

As I mentioned earlier, when you keep track of your progress in this way, it becomes a huge aid for setting goals.

Set Short Term Goals

Here are three ways I have used the above data to set short term goals for myself, pushing me to new heights:

1. I want my net worth growth to be better this month than last.

Let’s say my net worth goes up $1,000 from June to July. I then want my net worth growth from July to August to be $1,001 or more. Obviously, I can’t control the growth of the stock market, but I can control my spending impulses.

2. I want to cut my spending in this specific category by 50% next month.

If I notice that I spent more than I thought in a certain area last month – like books, for example, or on eating out – I set a goal for the next month to reduce my spending in that category by a decisive amount without jacking up my spending elsewhere.

3. I want my debt to drop more this month than last month.

Doing this works hand in hand with my net worth goal, but in a slightly more specific way. I’ll push hard to find a few extra dollars that month to roll into a debt payment.

I’ve also found that the social aspect of such tracking and goal setting is powerful. If you like to do this online, Wesabe is an incredibly interesting and powerful tool for sharing your information and comparing it to the progress of others. You can offer encouragement to others, let them encourage you, and push towards goals together.

I’m highly partial to doing this offline, though. Find a personal finance buddy and meet together regularly to encourage each other, share your progress and your challenges, and offer useful tips to each other. For me, the reality of meeting someone face to face makes such progress tracking more real – and it also adds a stronger edge of competitiveness to the mix.

In the end, keeping track of your personal finance progress is key. It shows you quite clearly where you’ve been, how far you’ve come, and where you need to go. It helps you see the areas where you’re successful – and points out the areas where you need more work. It constantly pushes you forward to bigger and better things.

In the end, watching your steps helps you follow that trail straight to your dreams, whether it’s a financial dream or a dream in any aspect of your life.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.