There is a saying “what gets measured gets managed.” Everyone who works a corporate job has heard that. It may be annoying but it absolutely has some truth to it. Consistent measurements can be critical to tracking progress in your financial goals.
One of the best things to measure, in my opinion, is your networth. I take the time to track my networth at the end of each month and it has taught me a lot over the past year. I hope you can take a few lessons from my exeperience. At the end I’ll discuss a bit about how I track my networth and other alternatives.
Wait, I have how much in that account?
Compound interest. It is a beautiful thing. It can work some serious magic on your finances. This means that if you have an account that you haven’t checked in quite a long time then you can completely lose track on how much is in there. This can be exacerbated if you’re making regular contributions to it. Think about it, how many of you really know exactly how much is in your 401K? However, not checking accounts regularly can have surprises that aren’t on the positive side. I have experienced two different surprises that taught me just how critical it is to track them more consistently.
Ever since I graduated college and started my first corporate job I would occasionally check my 401K. It would be incredibly sporadic but the only time I would deliberately check it was whenever I heard bad news about the economy. I think this was because I was checking to see if I was still in an alright position. Now I am sure we can all realize why this was a terrible idea. I was driving a negative sentiment when it came to that account and I realistically had no idea where my account stood on a “normal” day. To quote GI Joe “Knowing is half the battle” and I was subconsciously sabotaging my knowledge of my finances. If you asked me how much was in that account I would likely be off by 10 thousand dollars if not more.
There is the possibility of a different issue when it comes to not monitoring your account. It is similar to the first but can be much worse. However, in order to describe this issue, I will have to tell a very embarrassing story. This dates back to the very beginning of my financial life, long before I started my actual financial journey. This story is the poster child for why simplifying your finances and tracking your net worth are critical.
I love my parents very much but this story is largely about them starting me down a path but not giving me enough information. They tried to get me to start my financial life off on the right foot. When I got my first job (I was a lifeguard and I now feel obligated to tell any parents reading this to please tell your children to walk when at the pool) they took me to the bank and told me to open a Roth IRA. They had told me a bit about interest and given my aptitude of math I picked up the concept pretty quickly. After the account was opened with SunTrust Bank I thought I had made a brilliant decision. I set aside a bit of money each paycheck and deposited it into the account. Every time I deposited it, which was in person at the time, I thought I was making another great decision. I was securing my future after all.
After college I moved out of the south east and found using SunTrust quite difficult. Online banking was no where near the size it is now so I moved everything over to Wells Fargo. I mostly forgot about my Roth IRA but I figured it would be growing away until I got around to it. Well, when I started my new journey to a truly healthy financial life I knew I needed to catch back up with that account. After an absolutely insane amount of work to prove I was who I said I was I got access to the account again. The balance sat at just over $2000. This baffled me. I had deposited $2000 before I stopped using the account. Where was my 7 years of growth? Well now we see the issue with what my parents failed to tell me. I needed to actually invest the money once it was in that account. I had deposited all of this cash and left it there getting .01% interest. Now, this isn’t entirely my parents fault. Surely the bank should have told a fresh 17 year old (who looked about 13 at the time) that they were not using the account correctly but that is a discussion for another day.
How does tracking your net worth fix these issues? It means you are periodically checking your accounts and will not fall prey to misrepresenting your balance in your mind. Additionally, you will have general ideas of growth and can catch poor performing accounts. Not only will this prevent the egregious errors like mine, but it can catch smaller things. Did you change checking accounts and an automated investment get canceled? Does your checking account look slimmer than you thought? It won’t give you the answers to these questions. That requires more time. However, this will help you find out what questions need to be answered.
I learned to deal with market cycles
I will preface this part of the discussion with the fact that I have not seen a major market correction during the time I have been tracking my net worth. I do not know what it is like to see a prolonged downward trend in your account. The largest correction I have experienced is the unbelievably rapid decline and then recovery during 2020 due to covid. That was an unprecedented reaction and recovery that we will hopefully never see again.
As we all know the financial markets are not a straight line upward. If they were I think a lot more people would be confident in investing. There are minor corrections periodically and major ones every decade or so. Preparing for a major correction is difficult. Even if we assume a major correction once per decade that is still only 4-5 corrections in a normal person’s career. So how do you prepare? You monitor what your accounts look like and how you feel during more small corrections.
For example, since starting my financial journey the worst non-covid months was September 2021. There was a roughly 5% decline that month. Tracking my net worth at the time allowed me to see what my accounts looked like that month. During smaller dips my contributions would outpace the decline in the market so I would still see a net positive. September was the month I saw a normal correction wipe out more than my investments would have grown by with just contributions. It was a strange feeling but I learned one important lesson.
A market downturn doesn’t affect the cash you have. It sounds simple and obvious but I think some people miss out on this. If my 401k and IRA decline that doesn’t affect my ability to pay my bills. I still have my emergency fund and I still have my normal checking account. This also speaks to the necessity of cash reserves but again, that’s a conversation for another day. This prepares you to see a decline in your net worth but separate it from your day to day ability to make it by.
Of course this isn’t the whole story. Market downturns can and do impact people in other ways. If substantial enough it can cost people their jobs. I was furloughed for 8 weeks during 2020 which is part of what prompted my swing into learning all things personal finance. I absolutely don’t want to minimize anyone’s experience when it comes to that aspect of a down turn. This is only about your investments. I will write some further articles about how to prepare for a downturn which can cost you your job.
Budgeting and Motivation
Budgeting. I feel like that has become a 4 letter word to some people. I especially feel like far too many people in my generation have ignored it. It may be a huge pain and you may hate doing it but I think tracking your net worth can act as a huge source of motivation when it comes to budgeting. When you see that net worth growing month after month due to budgeting and automated investments it drives you forward. Positive reinforcement will always beat out negative. I think people focus on negative reinforcement when it comes to budgeting. They shame themselves when they overspend and that drives a negative headspace around your budgeting. However, when you see the positive results of budgeting on your net worth it pushes you into a positive feedback loop.
Say you catch some things in your budget and reduce them. As you track your net worth you can see the positive results and even make decisions to update your investments accordingly. That update will then further feed the increase in your net worth. This will keep you motivated to budget without feeling like you are drastically restricting or punishing yourself.
Conclusion
Tracking your net worth has a lot of benefits. It helps you stay on track with your financial journey and can ease some of the psychological walls you might run in to. It is simple to do and only takes a few minutes once a month to complete. This can be even more beneficial when married as it prompts a monthly discussion about finances. Finances can be a huge strain in marriages and by making it a consistent topic which keeps both parties on the same page it will minimize the stress on your relationship.
I will be writing a further article on how I track my net worth. It may sound simple and there are apps that “do it for you”. However, I take a more deliberate and customized approach which I feel gives more data. Feel free to keep your eye out for that further article.
SimpliFI 