Switching to the Net Worth Mentality

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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