Face the music… and dance! - Creating Wealth By Deliberately Growing Financial Net Worth
As a 23 year old husband and father of two, I was well aware that I had a lot to learn about household finances. One really helpful tool I had at my disposal at the time was Black Enterprise Magazine. Each month, I looked forward to the new issue of Black Enterprise and in particular, the profile they would do on a person or couple. In each profile, they would detail the assets and liabilities of the person, otherwise known as their financial net worth. They would also provide the person or couple’s back story and context. While I don’t have the old print magazine issues I used to read, I found one of their older articles online which provides an example of the types of back stories they’d provide. Click these links to see part 1 and part 2 of the article. While the “net worth box” table isn’t found in the online article, the print version included the table.
When I created my first “net-worth box” for our family, it was as follows:
For the past 25 years, I’ve updated our Financial Net Worth Calculation several times per year, with a goal of updating it at least quarterly.
The Benefits
Tracking Financial Net Worth provides a judgement-free, unbiased snapshot of our financial decisions. Looking at Financial Net Worth at any one point in time provides valuable information. But looking at how it changes over time is much more valuable. For example, the next time I updated my financial net worth box, a few months later, the credit card debt had not increased. This is because by the time I created this net worth box, I’d already committed to no longer using credit cards to borrow money. You can learn about this practice here. Instead of being discouraged because my Financial Net Worth was negative, I was encouraged that I wasn’t doing any more damage.
I found updating my Financial Net Worth calculation each quarter to be highly motivating. My goal became to increase my financial net worth each quarter.
Any positive change in Financial Net Worth creates wealth. This means that even if if our Financial Net Worth is negative, we can still create wealth. And while our Financial Net Worth improves through debt reduction, we often see the added benefit of improving credit scores, which brings me to another benefit of Tracking Financial Net Worth.
When you purchase an appreciating asset, like a home or valuable art, you get to enjoy the asset while creating wealth. When you acquire a home, a strong credit score reduces your borrowing costs. Most of the time, when you purchase a home, your Financial Net Worth does not decrease at all and over time it can (and should, if done responsibly) increase. Warning: Buying depreciating assets like cars and most jewelry will become less enticing because you’ll see how these types of purchases deplete Financial Net Worth.
Start Today
So if you’ve never calculated your Financial Net Worth, I encourage you to do it now. Here is a template you can use. Once you calculate your Financial Net Worth, set a goal for how much you can improve it by the end of this quarter.
Turbo-Charge It
Turbo-charge this behavior by focusing on one or two specific lines to improve. If you have credit card debt, set a goal to reduce it, even by the smallest amount. Reminder, the first step in reducing credit card debt is to stop creating it, forever. Also, pick a wealth account to target growing.
I trust you will enjoy creating wealth as much as I do,
wellbeingGrant