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You do not have to search long and hard to find posts on Net Worth. Everything from the basics of how to calculate it, to what you should include in it has been covered many times by financial experts. I can not tell you anything that they haven’t already. What I can tell you is why tracking net worth has been such a game changer for the Widget household.
Mr. Apathy Ends recently wrote a great tracking net worth post that started by highlighting two big reasons that may be discouraging to people just starting their Financial Independence journey. He addresses the possible negative psychological effects of having a negative net worth and not having complete control of if it goes up or down. Despite these concerns he goes on to state that we must face our financial situations head-on and I could not agree with him more.
If you are afraid that your net worth will be negative, go take a look at the net worth tracker over on Rockstar FInance. At the very bottom are Amber and Danny over at RedTwoGreen. They are currently on a get out of debt journey that started at over $600,000! This is very inspiring and they are a great example of why it is so important to know your entire financial picture.
I have no doubt that these two will get out of debt faster because they are aware of where they are and have a plan in place to address it. The source of their debt was to invest in themselves, which should make it easier to get out of debt as well.
It is also true that you do not always control whether your net worth goes up or down. The market will go down again (maybe???). I experienced my 401k drop in the 2008 drop but was able to continue investing for two reasons. One was because I did not have too big of a balance to begin with. The second was I knew I was a long way from retirement.
There are many things in life that are not within our control. Most of the time it is important to focus on the things we can control in life.
Recent Grad without a Clue
Early in my career I would track some aspects of my financial life in a homemade spreadsheet. I would run scenarios and projections on my 401k and salary, and that was about it. However, I never knew what my entire financial picture looked like. Perhaps I was afraid of what it would tell me.
Still, I felt like I was doing pretty well. I had a decent job, bought a condo, paid off my credit card every month, and was consistently saving about 10% in my 401k. I was also fortunate to have no student loan debt (thanks Mom and Dad). On the flip side, I bought a motorcycle, a new car, and was freely spending on food and going out with friends. I also was not doing any after tax saving.
Looking back I would give myself a financial grade of C+ at that point in my life (perhaps that is generous).
The Game has Changed
Shortly after getting married I began tracking our net worth in Mint and later in Personal Capital. Then, at the beginning of 2015 I decided to track our net worth monthly in a new spreadsheet, with the reasons it was going up or down each month. This is where the game changed for me.
By knowing our net worth each month, it drove me to address our entire financial picture. I began to not only concentrate on paying down debt, but also ways to increase income and our savings rate. I no longer wanted to tie up money in a new car since it was a depreciating asset. It also factored it into our home buying decision as well, since I wanted to keep our home equity allocated at a certain percentage of our net worth.
Instead of lifestyle inflation, I was experiencing the exact opposite, lifestyle deflation. No, my life was not getting worse. This just means I was spending less even as we made more. I did not become a frugal person. Mrs. Widget and I still believe in spending more on certain items and experiences that we value the most.
The Game Continues
For the most part, our net worth has increased month over month but there have been a few times it has gone down. Some of those instances were due to a big purchase (our choice) and some were due to our home valuation dropping on Zillow (not our choice).
Tracking net worth was definitely the game changer for the Widget household. There is no doubt in my mind that we are better off today because I started tracking our net worth a few years ago. It has been motivating to see it go up every year and try to figure out new ways to increase it.
The game was always there, all I needed to do was start playing.
Readers, how long have you been tracking your net worth? Have you noticed a greater drive to increase your net worth in all ways possible? If not net worth, what was the game changing moment in your financial journey?