What's Net Worth Got to Do With It?

The biggest concept I took away from the book, The Millionaire Next Door, was to track net worth. Because of this book, we stopped looking at our assets only and started realizing the impact our debt had on our goals. I'm embarrased to admit that it took a book to point this obvious fact out to me, but I'm afraid it's true.

Before this book, and the actions that followed, we'd managed budgets and felt we were responsible money managers; however, we believed that if we could afford the payment, we could afford the item. Our net worth analysis forced to to re-examine this false thinking and reconsider our financial planning. 

When we first began tracking our net worth in March of 2005, our net worth was a terrifying $-84,205.00  Your eyes are not deceiving you, that was a negative sign in front of the figure.  The saddest part of this situation is that we honestly felt as though we were doing well at the time. Without the net worth reality check, we'd still be living a financial mirage.

Once we realized how severe the problem was (mainly due to student loans), we began working on cutting expenses and adding income through job changes and extra work (a lesson learned from Dave Ramsey and his The Total Money Makeover: A Proven Plan for Financial Fitness). I began teaching for a college on the side and R began coaching more sports at the school.  We increased our income by over $20,000 per year and dedicated the extra income toward debt.

While Dave Ramsey encourages people to live on the bare minimum and focus solely on reducing their debt, we realized this wouldn't work for us.  Instead, we applied our extra income toward debt and combined it with the free online debt pay down calculators (http://www.dinkytown.com) to maximize our contributions.  These efforts, combined with a commitment to avoid new debt, allowed us to continue to travel and enjoy our children (when we had the time!) but also tackle our debt.

Did our process make the most financial sense?  Probably not.  That said, it did allow us to make progress without feeling deprived our missing out of the experiences we'll treasure with our children so we felt it was a fair compromise between best practice and our reality. More importantly to us, it allowed us to experience some level of success so we could maintain our motivation and still enjoy our lives.

Fast forward just under four years and our current net worth is now $239,500.32.  Yes, that's now a positive number!  I'll share the analysis of both net worth checks in the next post.