One of the biggest mistakes we make — and what keeps us poor — is that we do not keep records of our income and expenses. We suffer from Mental Accounting. Our mind is a poor accountant. You are always better off using Excel for recording and measuring your performance. Whether it is your diet or your finances, it is important to be monitoring. In fact, SMART goals are what we are chasing; and in SMART, the ‘T’ stands for tracking.
If there is only one number that you are going to track in your personal finance life, then it has to be your ‘ net worth’. I am assuming that all of you know that Net Worth (NW). Ok, NW is YOUR financial assets minus financial liabilities = amount of money that is working towards your financial freedom.
So you must monitor your NW. In case you do not know why you should monitor Net Worth, read on. It is easy to track, so it should be done! As long as you have a decent software or app tracking this number is not difficult at all. So it should be done!
It is one number that tells you where you are going. And it is just one number to monitor. It is a comprehensive number that takes all risk, income, asset allocation into account. Monitoring helps you take decisions like “should I repay the loan or invest the money”. Whatever is good to increase the Net Worth is what is to be done.
It puts things in perspective. When your dad says, “You have taken Rs 2 crore as a housing loan, I took Rs 12 lakh,” you remain calm and tell him on a net worth of Rs 8 crore, having a Rs 2 crore debt is better. Measuring and monitoring NW is better than monitoring income, assets and liabilities in isolation.
No guessing about what should happen — NW should keep going up. Doesn’t matter how fast or how slow, but it should not go down. Direction is important, not speed. It takes your mind off the day-to-day movement of, say, one share that you have! It hardly matters if it is 2 per cent of your assets. Otherwise, it occupies too much of your mind space.
It motivates you to reduce or eliminate debt. And it shows how investing or repaying a loan has an impact on the NW. NW can be a goal number for retirement or slowing down in business/service. If you have calculated your NW and are monitoring, it means you are serious about your life goals.
Shows the impact of your financial decisions during the year. Do you need more reasons? I will have to think more... However, the reasons are not so important as it is for you to implement it, NOW!