There is a very simple approach you can use to track your wealth and that is filling out the yearly net worth statement. This document, takes your assets and subtracts your liabilities. This is the best approach to use to identify how you are currently doing financially. This document helps you identify whether you are on the right path or the wrong path with what you are doing with your money.
First, let's identify two poor methods that many people use to identify how they are doing financially. One, is the yearly income. They think that because they are making more money this year than last year; they are better off. Making more money does not equal more wealth. As a matter of fact, it could lead to a lower net worth if you borrow to buy more stuff. That leads to the second poor way of tracking wealth.
Two, is stuff. Many people think they are better off after they have purchased a new car, a big home, a nice boat, or some other item that causes them to look successful. Here again, we have a poor metric that is used to identify financial success. That stuff loses value quickly and has plenty of ongoing costs that will suck you dry, one payment at a time. In most cases, the more stuff you buy, the less wealth you have.
So, what does improve wealth from one year to the next? You save a chunk of money that has entered your life and then increase that amount even more by investing it wisely into low fee stock index mutual funds. You are placing your money in an asset that appreciates over time (while dropping in value on occasion). This is part one of how to improve the overall wealth of the individual or family. Part two?
Part two is paying down debt. As you reduce and ultimately eliminate your liabilities, you increase your wealth. This is quite simple for those who want to increase their financial picture quickly. By combining a good savings rate with investing and a rapid pay down on the debt, you will see a dramatic increase in your wealth from one year to the next. Of course, there is always more to the story. Let's take a look.
There are times you might not pay down debt quickly. If you have low interest rate debt (under 4% for example), you would be wise to put your extra money in those low fee stock index funds, rather than paying extra on the debt. Your wealth will grow faster over time with the appreciating asset vs. the lower amount of debt that would come from paying extra on it. Opportunity cost is the issue here. What else?
You could select other assets that appreciate over time. That could be individual stocks and bonds, ETFs, real estate, bond mutual funds, CDs, commodities, annuities, cash value life insurance, etc. The list is endless. Some of those assets could work to increase your wealth, but many will not. Keep it simple, load up on low fee stock index funds at Vanguard, Fidelity or Schwab. Simple is good!
Where do you start? Complete a net worth statement. Go here and add to what you know and then download a net worth spreadsheet. Next, take an hour (soon) and identify the value of all of your assets and the total amount of your liabilities. Put those amounts on the spreadsheet. The formulas are built in so the numbers will add and subtract for you. Then you take a look. What are those numbers telling you?
They are telling you whether you are on the right path or the wrong path. People who consume a lot of products tend to have lower net worths. People who own appreciating assets tend to have higher net worths. No matter what your past behaviors, you can change. You can dramatically improve your net worth quickly just as that spreadsheet illustrates based on what you do with your money going forward.
Creating wealth is actually pretty simple and the net worth statement is there to show you how to do it; year by year. It teaches you what to accumulate and what to eliminate. It shines a light on what your behaviors and habits are doing to your financial situation. Finally, it demonstrates a path going forward that puts YOU in charge of not only your finances, but your life as well. Is that it?
No, not quite. This whole net worth statement discussion is meaningless if you don't do it. Knowledge is a wonderful thing, but the action that is needed will be the thing that changes the course of your life. Today is the day for action! You change your life by changing the way you think, how you feel, how you speak, and ultimately, what you do. Be that person who takes action. Be that person in the arena!
It is not the critic who counts; not the man who points out how the strong man stumbles or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows the great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat. - Theodore Roosevelt