“What gets measured, gets managed.”
–Peter Drucker
I have begun to measure my financial net worth (FNW) on a monthly basis. At the beginning of the month I tally up my assets and subtract my debt. That gives me my FNW.
Measure.
Some assets are easily quantifiable–cash, cash equivalents, and publicly traded securities, for example. Residential real estate is a little trickier, but by keeping an eye on properties in the neighborhood that have sold and by using a variety of valuation websites, I can calculate a reasonable number.
Commercial real estate and business ownership get even trickier, especially when other stakeholders are involved. Many people have deceived themselves and others by inflating values on commercial real estate and businesses and by thinking they are more liquid than they are.
Accordingly, I calculate two FNW scores–one that includes commercial real estate and business ownership and one that does not. I place more weight on the latter.
Debt, of course, is easy to measure. Lenders are more than happy to remind us what we owe!
Tracking FNW monthly might seem overzealous relative to more sensible quarterly or annual reviews. Really, how much are values going to change in a month? My primary reason for tracking FNW on a monthly basis, though, is to keep FNW top of mind. If I only tracked FNW quarterly or annually, I don’t think I’d maintain FNW as a priority. By keeping FNW top of mind, I’m more likely to defend my FNW, and grow it.
Manage.
Keeping FNW top of mind is a cognitive strategy that influences my decision-making. Will my financial choices add to my FNW, subtract from my FNW or be neutral? If I put money into a good investment, I’ll add to my FNW. If I borrow money to build a swimming pool, I’ll subtract from my FNW. If I pay cash for dinner, it seems I would not be adding or subtracting from my FNW; the result would be neutral. Then again, even in the seemingly FNW-neutral event of a cash dinner, I would be paying the price of opportunity cost. Rather than allocating cash for dinner, I could direct those funds to grow my FNW.
Strategy helps. It fosters a mindset, but I need tactics, too. My best tactical defense for FNW is a monthly budget. By committing to monthly spending limits, I ensure that dollars coming in are not casually frittered away and guard against sabotaging my FNW by borrowing money. Moreover, defensively managing the outflow allows me to set up my best offense for FNW, also within the monthly budget. With monthly spending accounted for, I can budget monthly savings commitments. The funds budgeted for savings are then ushered away from temptation and piled on top of FNW.
Why?
Measuring, managing, strategies, and tactics won’t be very powerful for me if I don’t have a reason for them. Why should I care about FNW? Because Kid Rock says I should. I watched an interview with Kid Rock in which he said the best thing about having money was that he could stick out his middle finger if needed. In other words, money gave him power over his life. Solid FNW provides financial security for ourselves and our loved ones. It protects us. Further, strong FNW gives us more options–more freedom. I also learned that Kid Rock gives a lot of money away, often to benefit people whom he doesn’t even know. The greater our FNW, the more we can make a difference in the lives of others. I don’t want to be in position of financial weakness, leaving myself and my family exposed and being unable to help others. To borrow the motto of the LAPD, I’m working toward FNW that allows me “to Protect and to Serve”.
How about you?
What’s your FNW? How are you going to manage it? Most importantly, what will motivate you to make your FNW a priority?
P. Gustav Mueller, author of The Present
Relevant Links
Merry Christmas 2024
Mortgage Free
Budgeted Giving
Here’s the Net Worth of the Average American Family, by Kathleen Elkins for CNBC.com, 5/15/2019
Average Net Worth By Age: How Do You Compare? Intuit Turbo Blog, Real Money Talk, 8/22/2018
Peter Drucker
Kid Rock
“To Protect and to Serve”, The Origin of the LAPD Motto