Focus on net worth instead of income.

Focus on net worth instead of income

Many of us put a lot of emphasis on the dollar amount of our income, thinking this number is what will make us rich. But, like being a business that focuses on revenue instead of profits, our income amount is meaningless until we subtract our expenses. If we focus on our net worth instead, we’ll have a much better awareness and be able to hit a financial goal.

Net worth is found by subtracting all our liabilities (debt, including mortgage and loans) from our assets (savings, investments, price for which we could sell real estate, vehicles, etc.).

The phrase “pay yourself first” is widely used to refer to a good habit of putting a percentage of each pay received directly into savings or investments, before we even see it or miss having it. Many people have had success with this concept. Bit by bit they increase their net worth, gain compound interest, and watch their money grow on its own.

Putting a small percentage of each pay automatically into a harder to access account, can push us to evaluate how we spend what’s left. It’s the same concept as using a smaller plate at a dinner buffet. It forces us to be more discerning about what we choose to put on that plate. Having a smaller number in our daily account will force us to be more discerning about how we spend and can lead to wiser decisions.

Take action: A great financial cleanup, that should be done at least annually, is to cut out any unused recurring payments such as subscriptions, memberships and bank fees, that no longer serve their purpose. Recurring fees may seem insignificant, but over time they really add up. Take that money and transfer it to your harder to access account.

:: Inspired by Mike Michalowicz’s book, Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine.

 


 

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