The Benefits of Gratitude … in Financial Statements
As we approach Thanksgiving, social media feeds are starting to fill with posts about what our friends are grateful for. These posts at times can carry their own kind of “Keeping Up with the Joneses” sentiments for us. “I would love to be grateful for that trip to Cabo San Lucas, too!”
One of the most difficult aspects of good financial planning is that many positive activities for our finances are what I call “short-term boring, long-term exciting.” Saving a percentage of income into a retirement plan every year will not look nearly as exciting as a neighbor’s boat purchase, but the results over time can make a tremendous difference.
One of the best ways to help investors see the long-term positive effects of short-term “boring” moves is to keep a personal net worth statement. This activity really amounts to regularly “counting your blessings” financially:
1) List all of your assets in the top section – checking and savings accounts, CDs, retirement plans, other investment accounts, real estate, cars, small business ownership, etc.
2) Next, summarize all liabilities in the bottom section: mortgages, student loans, auto loans, credit card balances, etc. These should be listed as total balances outstanding – not monthly payment amounts.
3) Subtract liabilities from assets, and you have your current net worth.
The first time a net worth statement is prepared, it may not be that exciting, as we have nothing to anchor the dollar values against. The real benefit of the tool emerges over years of tracking. Here are a few of the good habits that a tracked net worth statement reinforces:
- Saving – As bank accounts increase, and as contributions to retirement plans accumulate, these asset values will grow (in concert with market appreciation if investments are properly selected). One year may not look like much of a difference, but five years will.
- Home Ownership – Over time, the value of the home will increase – one of the major reasons a home is a good asset to purchase with borrowed money. This appreciation grows our net worth.
- Debt Paydown – As monthly payments are made on loans, credit cards, and other obligations, a portion goes toward interest – but an ever-increasing portion each year goes toward debt paydown. Seeing liabilities shrink in value may not be motivating over a one-month time period, but over several years the effect of committed debt paydown can trigger powerful, positive emotions.
- Determining the difference between “spending” and “investment” – Over the short term, a dollar spent on a fun purchase and a dollar spent on mortgage paydown may seem quite similar – even perhaps weighted in favor of the dollar on something fun! A tracked net worth statement starts to show the dramatic difference between the two, though: money put toward purchasing an investment that grows in value or paying down a liability to reduce interest payments is NOT an expense: it is a reallocation of resources. Unlike spending, a dollar that goes from my checking account to long-term investment (like stocks, bonds, or even mortgage paydown) moves from one line item on my net worth statement to another: it is preserved.
If you are inclined to “count your blessings” during this Thanksgiving season, start a habit of keeping a personal net worth statement, then update it annually around this time of year. Over the short term, it may not seem like much, but over the long term this habit can become a powerful motivator, reinforcing great financial actions!
Ready to get started on your own statement?
Joel Cundick
Financial Advisor / Team Lead