Monitoring Your Finances Reveals Priceless Lessons
A most important element for building wealth is to measure it.
The people I know that have continually increased their net
worth track it in order to direct it and stay motivated to reach
ever higher financial goals. Seeing the quantifiable results of
your spending and investing decisions is the first step to take
control of them. Contrarily, the people I know in the worst
financial shape have no idea where there money is spent and are
too afraid to know what their net worth might be because it
won't be pretty. Which extreme more closely matches your
attitude? As Dr. Deming says, "You can't manage what you don't
measure." Think of it: if you were seriously wealthy, you'd
spend some time every week managing some aspect of money. Well,
if you want to improve your financial condition, a beginner
version of a money management and tracking method is required.
In addition, the more money you build up, the more financial
assets and obligations there are to monitor. If you don't have
your financial tracking in place before you acquire them, I'd
bet that you won't own them for long.
If you don't see and feel the gains and losses of your financial
decisions - you are playing the complicated money-game of life
without any scorecard. This is how so many people with decent
paying jobs and insurance still get into financial trouble. You
need to have navigation reference points to know if you are
steering toward building wealth or destroying wealth. It is by
monitoring your net worth that you'll start to uncover the
financial impact and consequences of your decisions.
The starting point for financial measuring is a simple statement
of net worth (or balance sheet). If you have never heard this
term, it is a list of the current market price of everything
that you own and what you owe to others. The difference between
these two numbers is called your net worth, and this is the
number that you want to measure and increase every single month.
As with a business, once you start measuring the financial
consequences of your behavior you can begin making your own
personal spending rules. For example, if most of your monthly
income is spent at restaurants, try making a rule that you only
go out twice a week. If you're spending too much money on
gasoline you need to find several ways to reduce it. Simple
insights and subsequent rules like these will help increase your
net worth, which will lead to bigger insights and develop into
bigger gains.
If you find that you have a lot of debt that is decreasing your
net worth, or possibly a negative net worth, then what rules
about debt are you going to create for yourself? After you get
some money saved, where are you going to put it? How much time
are you willing to spend monitoring it? How much effort are you
willing to exert to educate yourself about investing? These
questions will aid in building your investing rules. Eventually
you'll have rules for spending, saving, employing debt, and
investing that will shape your personal plan for you to start
moving your net worth in a sharply positive direction. Think
about adding a rule to read a new financial book each year. Your
financial statements and financial rules can be as simple or
sophisticated as you want to make them. If you keep making even
baby steps forward, it may become no big deal to have specific
rules for retirement planning, tax implications, entity
structuring, evaluating investment real estate, checklists for
buying mining companies, or selling a company you've built.
When you have calculated your first statement of net worth, you
start having the ability to plan for purchases and payments. As
a simple example, if your auto insurance bill arrives once a
year, you can calculate how much money that you need to set
aside each month to easily pay it when it arrives. Or if you are
getting a new car, you'll be a lot happier planning for the
initial costs before you get squeezed at the end of the month
and end up paying a few bills late.
After you get comfortable with a net worth statement, you can
move on to an income & expense statement. Then move on to making
projections for all of your statements. And creating scenarios
such as: How much is a reasonable goal for retirement income for
you? How much net worth will you need by when? How are you going
to increase your income, increase your savings, increase your
investment returns? The answers will be built upon the financial
habits, tools and education that you'll develop, but it can all
start with your first net worth statement.