Do I Need to Know the Simple Math Behind Financial Independence?
No matter where you are along your financial independence journey, "running the numbers" is an invaluable way to determine your financial health.
For many in the FI community, the details of years until retirement has already been written by a popular blogger (the mustache guy).
Aside from knowing your present net worth, why is it important to "run the numbers" at least annually.
We will cover calculating net worth in another post. For now, the basics are...
assets - liabilities = net worth
Assets are anything you can sell or utilize for future monetary value and are assessed at present value to the marketplace.
Liabilities are what you owe. Where is your money "spoken for". Include everything here. Even that stupid yellow couch you had to finance.
Why Should I? What if I Hate Math? etc.
First and foremost, you need to track your net worth because it allows you to always know where you stand financially. How close are you to your target? How much more money needs to be saved? Do I need to increase my savings rate? Decrease my expenses? You will need to keep track of the numbers. Keeping track of the numbers is the primary reason to calculate your net worth on an annual basis.
Yet that is not the only reason to "run the numbers".
The second reason to get your ass moving on the math is because of what you will become in the process. As the late Jim Rohn says (I am paraphrasing), 'Don't start doing something just for the sake of doing it, rather for what you will become in the process'. So if you think you are bad at math or terrible at tracking finances, then imagine how could you will get by practicing every year.
The third reason is because it helps keep you on track and motivated. By calculating your net worth, you are able to track your progress and stay motivated towards your goal. A word of caution: do not let this overwhelm you. Far too often I hear of this causing anxiety instead of providing motivation. You are only doing this to make sure you stay on track. Some years you will make large strides. Other years will seemingly be a standstill. Expect that. It is not supposed to be a nice, smooth, linear road along the way.
Fourth, you will be amazed at what you learn as you practice tracking your net worth every year. For example, four years ago I had no idea what the hell a 457(b) was... Now my wife and I have over $50,000 in one. I am not telling you this to brag---or maybe I am but who cares---but instead to illustrate my point. "You don't know what you don't know until you know it". Not sure who said that but it sounds profound, yet sound and true. You will discover things along the way that you never imagined will accelerate your net worth. It's like finding the login to your pension plan and discovering you have already contributed $70,000 to the plan which you can choose to withdrawal prior to retirement. You never accounted for that in your calculations, and now you get to add it all at once. Trust me, it will happen.
Fifth, you will identify where others are making mistakes. Use this superpower with caution. Don't be condescending. Be helpful. Point out to a friend the importance of investing in low cost index funds. Show your neighbor how to start investing. Inform your cousin of how you decided to choose your life insurance policy.
These points are all manifestations of you getting better at managing money by improving your ability to track and calculate your worth. It just happens naturally. Don't believe me... give it a try.
Quit procrastinating, and start tracking. Track your net worth. Track your expenses. Track your investment contributions and savings rates. If it causes you anxiety initially, that's alright... keep going. If you simply cannot get over the anxiety, then perhaps wealth and financial independence aren't all that important to you.
Leave a comment below. What have you learned by tracking your money over time?
Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.