Measuring Your Financial Progress
Monday, June 25th, 2012
Many times people measure their financial progress by how much money they make, the things they acquire, or their ability to pay off debt. Although all three of these measures can contribute to a person’s financial progress, none is an accurate measure to actually determine if progress is truly being made.
A person’s financial progress is more accurately measured by a formula called net worth; however, many people may not be measuring their progress at all.
Why would we not want to measure our progress? Perhaps you’ve heard someone say they’re afraid to see a doctor because they might find out something is actually wrong. Is no news good news? Of course not, but sometimes we’d rather not know the truth whether we’re talking about our health or our finances.
When it comes to our finances there may be other reasons why we don’t measure our financial progress:
- Our financial net worth is insanely abundant.
- We don’t have time.
- We don’t know how.
If you’re financial net worth is insanely abundant, well, would you mind passing this article on to a friend? If you don’t have time or you don’t know how, perhaps this article will help make the task a little less daunting.
First, to measure your financial progress, it may not be necessary to track each and every expense month after month. Tracking expenses has more to do with budgeting, which may be necessary if you find your net worth is not increasing.
There are two components to calculating your net worth: assets and liabilities. The assets are the things you own such as bank accounts, vehicles, IRAs, 401(k) accounts, and real estate, to name a few. Liabilities are the things you owe such as credit cards, vehicle loans, school loans, and a mortgage.
Your net worth is calculated by adding all your assets and subtracting all your liabilities. If you have more assets than liabilities, then you have a positive net worth.
The idea is for your assets to increase and your liabilities to decrease over time so your net worth will increase. An increasing net worth translates into financial progress. Thus, if someone makes a high income, but does not buy assets or reduce liabilities, then chances are little progress will be made regardless of the amount of income one earns.
How often should a person’s net worth be calculated? At first, a monthly net worth calculation would be beneficial to become familiar with the process as well as to learn what makes net worth go up and what makes it go down. After getting familiar with the net worth process, a quarterly calculation may be more appropriate, and then eventually once per year would suffice.
Here’s an abbreviated, hypothetical example of the net worth calculation:
In this example net worth increased from month-to-month which indicates financial progress.
Preparing a net worth statement as shown above can be much less time consuming than keeping track of monthly expenses. However, if you find it difficult to increase your assets or pay down debt, it may be necessary to track your expenses for a few months in order to look for ways to save money.
There are three important points to keep in mind about improving your net worth:
- Spend less than you make.
- Reduce debt since interest charges reduce net worth.
- Invest in assets that tend to pay income or appreciate over time.
Disclosure: Bil Sadler, CFA, CPA, CFP®,Securities offered through H.D. Vest Investment Services, Member SIPC, Advisory services offered through H.D. Vest Advisory Services, 2531-C Lafayette Plaza Dr., Albany, GA 31707. The views and opinions presented in this article are those of Bil Sadler and not of H.D. Vest Financial Services® or its subsidiaries.