Updated on 09.18.14

Switching to the Net Worth Mentality

Trent Hamm

A recent conversation I had with an old friend started something like this.

“So, now that you’re writing full time, how much money are you making?”

“…. I don’t know.”

“What do you mean you don’t know?”

This is a line of thinking I wouldn’t have believed just a few years ago. Not knowing what my pay is? I used to know my paycheck down to the penny. I could quote you the exact day it would arrive for the next year and knew the exact amount of each payment.

Now? I have to actually look up this information. I occasionally estimate my salary for tax purposes, but that’s about it. I know roughly when checks will arrive, but again, I don’t sweat it and worry that things will fall apart if this check doesn’t arrive now.

It’s the difference between the paycheck mentality and the net worth mentality.

I used to be deeply ensconced in the paycheck mentality. My personal finance was based around the amount of that next paycheck, and my spending would reflect it. I’d blow most of it pretty quickly upon receiving it, paying bills and buying frivolous stuff, and before long I’d be right back where I was, waiting for the next check to come in. Even worse, I’d often continue the high living on credit.

That mentality is extremely dangerous. If your job goes poof, you’re in deep trouble. You can’t possibly spread your wings and try something new – you have to keep at that same job, even if you hate it. Sure, your weekends are fun, but Monday mornings become a nightmare.

The last two years have revolved around switching from the paycheck mentality to the net worth mentality. The net worth mentality is all about spending less than you earn – and making that gap as wide as possible. Do this for a while and you’ll find your checking account is fat – and suddenly it doesn’t matter too much when your paycheck comes in. Instead of building up, your debts start going away, meaning that before too long your monthly expenses get even lower.

In a visual way, my spending used to look something like this over time (with green representing spending and blue representing income):

graph 1

… and now it looks something like this:

graph 2

Paycheck Mentality vs. Net Worth Mentality

Paycheck Mentality

My spending varied based on the income. If I made $50 extra by repairing a computer, I spent it. If I received $100 as a gift, I spent it immediately. There was very little thinking about the long term, and quite regularly I spent a bit more than I brought in.

Net Worth Mentality

It was a gradual shift between the two – my spending didn’t vary much at all from month to month, regardless of any variations on my income. Thus, it becomes reasonable to have a much looser grasp on your month-to-month income, though you still follow it.

The net worth mentality is the one that leads to long term stable wealth. The road to wealth is that gap between the blue and green lines in those graphs. If there is very little gap, then your road to success is very narrow, indeed, and it’s very easy to fall off and not reach your destination. Widen that road and it becomes much harder to fail, even if the blue line occasionally drops or the green line occasionally leaps. In fact, it doesn’t even really matter how you invest

Tactics to Making the Switch

So how does one make the switch? Here are a few tactics to try.

1. Commit to spending far less than you earn

If you need to look at your checking account balance at all to find out if you can afford something, then you haven’t cut your spending enough. You can inflate a bit later on – the key is to get used to spending less. This means practicing basic frugality: cooking at home, doing things yourself, looking for ways to trim the fat, and so on.

2. Build up a healthy padding in your checking account

I view this as the first success. You’re no longer living from paycheck to paycheck – if you lose your job, you’re not facing an imminent collapse of your personal finance situation. I usually keep enough in my checking account to cover all automatic payments for the next month plus another month’s worth of living expenses, just so I don’t have to worry about the balance at all.

3. Stop buying stuff impulsively

It’s absolutely fine to spend money on fun stuff sometimes. Just spend some time thinking about it and planning for it. Don’t ever let a dollar leave your pocket without some forethought in another environment, meaning don’t spend money at the store without having thought about it first at home, or don’t spend money online without thinking about it first offline.

4. Don’t reward yourself for success

Instead of buying something to celebrate, just enjoy the taste of success for what it is – success. It doesn’t have to be accompanied with stuff.

5. View success as spending less

I now view a clever way to save money as being just as big of a deal as a clever way to earn more money. Nothing matters other than that gap, and thus lowering the green line means as much as raising the blue one. In both cases, there are reasonable limits on what I’ll do to raise it – I won’t be a cheapskate to lower the green line, and I won’t be unethical to raise the blue one. But when I find a way that matches the way I behave that can lower that green line, it’s just as big of a success as a nice fat bonus.

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  1. Rick says:

    “Don’t reward yourself for success.” – Thats right, all the goal setting books/advice say to not reward yourself for accomplishing your feat. Most goals/success come with hard work and sacrifice. If you never have rewards, all you have is hard work and sacrifice. Thats not a fun life.

  2. Johanna says:

    I’m not sure that being in a good place financially is necessarily incompatible with knowing more about your paycheck than you know about your net worth. I have a rough idea of what my net worth is (it’s been going down lately, through no fault of my own, because most of it is invested in stock mutual funds, so it’s kind of depressing to keep tabs on it on a day-to-day basis), but I don’t know it nearly as well as I know my paycheck. Which is the same every pay period. And which is a lot more than I spend every pay period.

  3. Jules says:

    @ Rick: It’s an even sadder, less fun life if your only sense of reward comes from buying stuff…

    I guess it depends on what you mean by “reward”, though. I have, next up on the list of things I’d like to get, a good wristwatch, one that can stand up to being bunged around when I ride my bike and maybe an immersion or two if I forget to take it off before washing my hands. It’s not exactly a reward, because it’s something I need (at least, it’d make my life much easier), but it’s not exactly a routine expense, either.

    Otherwise I have to agree with most of this. Except that I still have to keep close tabs on our income and expenses–it’s SO easy to pay with your ATM card here, that I’ve gone back to using cash for almost all of my purchases because otherwise I lose track of what’s spent…

  4. Thanks, this is the first post I have seen in a long while that has taught me something new about money (not from you, just from all blogs in general).

    I hope to be here one day, but right now we are starting our monthly budget off in the hole…. ugh!

  5. Jesse says:

    Great post. Getting out of the paycheck mentality and focusing on building something (be it a business, a writing career, or just your net worth) is so much more rewarding!

  6. Ann says:

    What a great change in mindset! One question though, how would you do this if you’re trying to pay off debt at the same time?

  7. Kate says:

    A reward could be to take time off to read a much-anticipated book checked out from the library or even take a much-needed nap. It doesn’t have to cost money.

    I am in a transitional state right now as I am in school and working full-time only during the summers and part-time, if at all, during the regular semesters.
    I am thinking of this time as an investment in my future that will pay off down the road, so I don’t try to spend too much time in the paycheck mentality or I’d go crazy. Oh well, only two more years to go.

  8. Adam says:

    @ Rick: What he meant was that in the process of saving money, when you get a bonus you shouldn’t go out and blow it all because that will just be a backwards step in achieving your goal. And you make no sense since it would be like rewarding yourself on a diet by eating a whole cake. There are more ways to reward yourself than through buying stuff and they are much more fulfilling.

  9. Trent Hamm Trent says:

    “A reward could be to take time off to read a much-anticipated book checked out from the library or even take a much-needed nap. It doesn’t have to cost money.”

    Yep. Those are my kinds of rewards.

  10. Tiffany says:

    I disagree with the point about building padding into your checking account. I used to do this–I would always keep 3-5K in each checking account I regularly used so that I would never have to worry about covering bills. However, recently I switched to keeping just enough to cover my necessities and my average credit card spending, with the remainder in savings or invested. I have automatic overdraft set up so that if I ever have an unusual expense that I have to cover, I won’t get hit with overdraft fees, but effectively I am living paycheck to paycheck.

    Rather than stressing me out, however, this forces me to keep a close eye on my spending–I know that I have the money stored away if I really need it, so financial disaster is never a worry, but it’s a great psychological tool to ensure my spending is under control, and has the added benefit of generating more income (since the money that would otherwise be in checking is in high-yield savings or invested). I found it was much easier to spend impulsively or frivolously when I knew that the money was right there in the checking account, rather than tucked away in a separate account.

  11. michael says:

    One suggestion for folks like me: I had a hard time building up savings, because I was always putting extra money into my mortgage or doing (much needed) home improvements. So I started sending a little extra each month for all my monthly bills (just $10-20). Now I’m around 2 months ahead on everything AND have a little savings, so I’m nearly set in case of emergency.

    When I’m a full 6-months ahead, I’ll take the 3 months in Europe I’ve always wanted.

  12. Disagree about the padding, but to each their own.

    Also, the reason you don’t know what your making has more to do with the fact that you are self-employed/writer than you have switched mentalities. Most people know what they make because they get paychecks, even if they have a “Net worth mentality”

    Reward yourself in non-spending ways might be a better way to put it.

  13. KC says:

    I keep about 25% more in my checking each month than I spend. So if I spent $10,000/mo I’d keep $12500. I don’t spend that much, its just an easy math example – LOL! But I have a friend who keeps $75k cash cushion in her checking. I’m not kidding. I asked her why?? She said that’s what it takes for her husband to look at his ATM statement and feel rich. Granted these are very high income people, but still – that’s a tad excessive. I’d rather have that money sitting in a money market – I’d check that balance on my ATM if I wanted to feel rich.

  14. Sara says:

    Yep, the end the number that matters most is your net worth total, not your paycheck. Still, I find tracking my income to be very motivating.

    It seems like you’ve got a strong work ethic, so I wouldn’t be surprised if your income kept reaching higher levels than you realized once you stopped tracking it very often. Money’s funny like that.

    In terms of rewards, I would argue that it’s not ideal to be rewarded with money (experiences and peace of mind being far better stand-ins). Still, one of the best rewards I can have is hitting a new savings goal. The rush is way better than a new toy or outfit!

  15. dgeezer says:

    I do believe that self-employment coupled with a frugal mindset is a good avenue for success.

    I have been self employed since I was about 26 years old. I have always been worried about having enough to live on since never really knew what I would make in the near future. I would keep fairly close tabs on monthly income but it was always a bit nebulous. Because of this I would sometimes get a pretty decent check for an assignment that I didn’t really need. I was able to put these windfalls into savings and eventually Real Estate investments.

    I took regular job for about a year, and actually made a decent salary, slightly more than my average net for the previous several years. However, I quickly fell into the paycheck to paycheck mentality, since I now had predictable earnings, and didn’t put a dime into savings the entire year. Now, I am back happily self-employed and working on another rental house.

  16. Webomatica says:

    Good article. Right now we’re experimenting with an “artifical scarcity” tactic, which goes contrary to leaving “padding” in your checking account. Basically, there’s enough in checking to cover the bills but all extra gets shunted to a savings account. By seeing there’s not much money in the checking account, this inhibits spending, but the money is still there if need be – the surprise is we haven’t needed that extra money for several years now.

  17. Dave says:

    The stock market is laying waste to my net worth these days :-(

  18. Carrie says:

    This makes a lot of sense to me. I’ve used different words to describe the paycheck mentality, but your post definitely makes it clear. I’m glad to know that I’ve been working from a net worth mentality most of my life.

    What I find to be difficult, however, it is to help friends and family understand the freedom that can come in moving away from the paycheck to paycheck mentality. Some people just don’t get it in the midst of the immediate gratification.

  19. Stephanie says:

    I think when I graduated, I started thinking more in the net worth mentality since I had some assets but plenty of student loan debt. And knowing that my money grows through savings, retirement accounts, and salary is balanced against lowering my student loan debt. I do like tracking my money, as it gives me a sense of control. And I especially like tracking my net worth, because I can see it going up (even though it’s still negative), and it gives me the sense of accomplishment.

  20. “But I have a friend who keeps $75k cash cushion in her checking. I’m not kidding. I asked her why?? She said that’s what it takes for her husband to look at his ATM statement and feel rich.”

    LOL, that reminds of times I have viewed my balance on ATM machines in foreign countries, whose currencies use ‘$’ but are worth way less than the US dollar. Examples: Mexico, where your balance is quoted 10x higher, or Colombia where it’s 2000x. That always makes me feel a little bit richer.

    I’m not sure if there are ATM machines in Zimbabwe, but right now the exchange rate for the Zimbabwean dollar is 10 Billion to 1 US dollar (‘m not exaggerating – look it up). So the $75K turns into 75 TRILLION DOLLARS. Seeing that kind of balance would make me feel rich. :-)

  21. Bill says:

    Paycjck income is a lot more regular (less risk) than freelance or other entrepreneural income (significantly more risk)

    So the logical response is to minimize and religiously track consumption expenses.

    That’s exactly what the successful small businesspeople profiled in the book “The Millionaire Next Door” made a habit of doing.

    And by doing so, most were able to build a net worth to the point of having a “walk away from it all” (I think the book calls it a “go to he**”) fund.

  22. Dave says:

    Thanks to this post, I just checked my net worth and was shocked to find that I’m still in the negative (graduated from college and bought a car last year, so nearly $28,000 of installment debt, with 12 months salary under my belt)!

    Even though I did something unusual today, and DIDN’T read TSD till late, I was surprised/happy to find that your other post today applied as well; I put back a $17, 12-piece rubbermaid food storage set for their lower-end stuff, 10-pieces (which are more useful sizes!), for just $4.44 total! I don’t know enough about what kind of containers are good or not, and the ones I have work fine, I’m just augmenting, so the frugal way was the best way today!

  23. Flea says:

    I salute you Trent…I would have a tough time adjusting my mentality the way you have.

    It has been so ingrained it would be tough to shed.


  24. Carlos says:

    Good ideas, indeed. I will warn you, however, that it’s rather important not to lose track of your immediate income. Income is KING (ask any person of retirement age). Even if you have a very high net worth, it’s really important to make sure that your income stream remains consistent, lest you have to dip into your savings and investments.

    If I were you, I’d spend a lot more time raising my current income (try cutting TSD back to weekdays only, and work an outside weekend job) – one that offers a 401(k).

    Spend a lot less time postulating about why your “new found” approach is better. You will need at least $2 Million to call it quits (and, more likely, $3 Million). The sooner you earn $$ and invest it, the sooner you can focus on your new approach. The time value of money is hard to argue with. For those that haven’t played with MS Excel’s FV function, learn it, live it, and love it! Start today, retire sooner.

    Skip Sharebuilder and purchasing individual stocks (it’s a total waste of time), and establish these three goals for yourself:

    Achieve Vanguard Voyager Status (100k in VG assets) within five years.

    Achieve Vanguard Voyager Select Status (500K in VG assets) in xx years.

    Achieve Vanguard Flagship Status ($1 Million) in xx years.

    You fill in the xx blanks, depending on your income, ability to raise it, and your ability to save.

    These are real goals worth working achieving. This is the stuff that really matters. Period. What kitchen stuff to buy is preaching to the converted. Get religion around earning and saving money like your life depends on it.

  25. Dody says:

    Retirement? People my age won’t be able to retire!

    Anyway, I love your idea. This happened to me about the time hubby stopped driving to work. We no longer had to pay 240 dollars a WEEK for him to get to and from work. We built up a few thousand and then he lost his job. We have since had to dip into the savings. Either way it was nice to know we had a cushion. Now I am employed, self employed, and building up our cushion again. It’s nice to know we might actually have that again.

  26. reulte says:

    Comment 1 — if you work to arrange your life the way you want it then your goals ARE your successes and don’t need to be rewarded by something extrinsically related. If my goal is to spend more time with family, then I don’t need a reward for achieving that goal; spending more time with them is rewarding in itself. The reward for finishing laundry is clean clothes, the reward for writing TSD is the satisfaction of having others read it, comment on it, live it . . . If my goal is to quit work and become a freelance whatever, then I don’t need a reward for achieving that goal. Success is the reward.

    Comment 11 – feeling rich is easy, I want to BE rich! :-)

    Comment 21 – Whew! That certainly was . . . evangelical.

  27. getagrip says:

    While I don’t have a problem with the bulk of the article and its point, I take a mild exception to your response to your friend. His question seemed to me more along the lines of “are you doing as well as you thought you would be?” or “are you doing okay financially?” I’d have probably responded the same way he did had I asked this or a similar question and gotten your response because your response strongly implies you don’t care how much money you’re making.

    However this is counter to your articles and tone just before and when you first started full time writing. You were very concerned about ensuring you were sustaining a certain income level (though you were pretty sure you had an idea that you could). Only now that you have already tested the waters and are reasonably confident that this minimum level of income is actually coming in, even if you don’t know it to the penny every month, can you respond like this.

    Secondly, had a friend responded like you did to me, I’d be all over them to get their act together and know their income because they have quarterly tax statements due and they’d better get those right or they might be in for a rude surprise come tax time next year :-).

  28. It’s a myth that you must spend to feel good. A reward can absolutely be without financial cost. Besides, those who reward themselves with things they can’t afford are seldom able to enjoy them they way they would if it was already “paid for.”

    Bottom line: there’s a lot less stress (a huge reward in itself) when you’re in net worth and not leading a paycheck-to-paycheck lifestyle.

  29. FHR says:

    @Carlos……$2M to retire? You gotta be kidding me. I can’t possibly think of anyway I would need that much to retire.

    That type of thinking is destined to cause you to work for the next 10, 20, 30, +++ years.

  30. Kim says:


    Yet another thought-provoking article. Thanks!

    Here’s a suggestion for those of you who use
    Microsoft Money & want to see the income versus outgo trend Trent. Under “Reports” choose “Income and Spending Over Time”. In seconds, you can have a lovely yellow and blue bar chart that tracks your montly income and expenses. You can set it for any time period you wish.

    We call it the “Living Below Our Means” chart and it’s rewarding to watch the gap grow between income and expenses. (Especially when our net worth is actually falling due to current market conditions).

  31. Flexo says:

    Trent: The reason you may be able to switch from paycheck mentality (thinking/worrying about income and expenses vs. income) to net worth mentality (widening the gap) is because you’ve already learned what you needed to from the paycheck mentality. Before one can grow their net worth, one has to understand their income and expenses… when that is less of a worry, they can move to the “next step” like you have done.

    Good article!

  32. bob says:

    I reward myself every time I increase my automatic savings contributions, which is a permanent increase. Usually a dinner out with the wife.

  33. Mike says:

    When talking about rewards I had the biggest buzz kill when we paid off our debts to get ready to build our house. My wife and I had about 20,000 in student loans and another 10,000 in car loans. We managed to knock this out in about 4 years though spending reductions, being “DINKS” and me driving my parents left over cars just before they went to the junk yard. When the last payment came I expected something angelic choirs from above, confetti and fireworks exploding. What had happened was over the four years we modified our actions some much that need to spend and have excess wasn’t there. So while the advice of “Not Celebrating” is good, I think this is only learned though the journey of organizing your financial house.

  34. Lola says:

    I’ve always spent much less than I earn. Always, ever since I started working (some twenty-plus years ago). I never earned much, but, since I never spent much, I feel free and happy. I know I can quit a job if I’m not satisfied, because I have enough money to live by. And obviously, we don’t need to spend money to feel happy.
    However, I know I do spend more money when I get my paycheck. I feel too stingy if I don’t buy some little thing, usually related to food. Nothing fancy, a bar of chocolate or something I haven’t eaten for some time. I need some (very cheap) way to reward myself, or else it’s just saving money.

  35. SteveJ says:

    Thoughts on the comments:

    I certainly know what I make every paycheck (since I’m salary), but I couldn’t actually tell you my salary without checking a stub for the gross and doing the math. It comes up fairly often (many of my relatives obsess about other people’s money), and I usually just take a lowball guess.

    And the greatest feeling was when I was 26 years old was paying off my bought-new car. I’m now wiser and wouldn’t finance a brand-new car again, but to carry that off was tremendous. I still get that feeling with every loan paid off, every extra mortgage payment. On the other hand, when the stock market goes up or down, I don’t care. I didn’t actually do anything, I just stuck my money somewhere and hoped for the best. It’s just a well researched lottery ticket.

  36. FortySomething says:

    Having reached a point where my nest-egg is fully funded before age 50, I think this post reflects some of the reasons I was able to get there.

    1st of all, my income has always been highly variable (heavily bonus and/or commission based). And 2nd of all, I have always sought some form of equity participation in my work (i.e. profitsharing, stock options, etc.). That way, I can reap some of the profit upside from my own efforts.

    Since I never know exactly what my income or employment situation will look like from year-to-year, this has forced wife and I to live as much as 50% below our means. It also forces us to do a lot of advance planning and always have a Plan B for the worst case. We set a budget at the beginning of the year, track it semi-monthly, and update it mid-year. This requires tracking expenses, but not income. So, if you asked me what my paycheck is, I might have to look it up. But, if you asked my how we’re doing against certain budget items, I would have a pretty good idea.

    Also, as part of the wealth mentality, I think its important to always think about maximizing your own worth. What I mean is that you should be maximizing your income generating ability via higher education, new work experiences, etc., things that make you more valuable to your employer, your clients/customers, and to the job mkt. And/or if you have the temperment for having your own business, then you should be thinking in that direction (and make sure you have the capital set aside to take advantage of opportunities). For example, we own income property and wife has her own home-based business. These have enhanced our income and NW over the years and provided some great tax bene’s.

    All in all, I think the wealth mentality is a valid concept. You have to have good habits and an open mind for opportunities. You also need to have goals, discipline, and a strong work ethic. And you also need to cultivate solid family and friend relationships (because they gives you the strength and support to do everything else).

  37. Louise says:

    Your friend asked you how much money you make?

    Wow. Just….wow.

  38. Yuri says:

    @Louise – it’s not necessarily offensive to be asked how much money you make.

  39. Robert says:

    Use mint.com to know exactly what your net worth is at any one point!

  40. This is a great article. I have always focused on my net worth more than a paycheck.

    I think another mindset that holds people back is a paid by the hour mindset compare to paid by results mindset. In other word, consciously focusing on the most valuable activities on the job instead of just filling the day. This mindset switch reduces work stress and the number of hours required to finish important work.

    The paid by results mindset also positions you for easy pay increases over the life of your employment.

  41. Kelli says:

    I have been paying close attention to any of your articles that pop up about net worth. Love the concept. I also love that your chart looks veeeery much like the examples offered in YMOYL. Big fan.

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