Creating a budget vs. Tracking Net Worth

[n_vizion]

Hi Everyone,
Earlier this year I began to focus on tracking my net worth more intently rather then following a super strict budget. Watching my net worth increase from month to month seems like a more flexible method then managing every cent. Don't get me wrong, I still have a budget in place, but I am more motivated by tracking my net worth month to month then by telling my self that I only have a certain amount to spend on things.

Which method works best for you?

[Scanner]

I tend to track net worth too, as it's very bottom line.

You can still be "on budget" but not increasing net worth.

Still, I don't want it to be an excuse to not slash where some things could be slashed. For that, a budget is very useful.

I actually think it's instructive to look at running your household like a business (it's the small business person in me).

Your budget is affectionately known as a "PRO FORMA CASH FLOW STATEMENT" in the business world. Your personal net worth is analagous to your business' "BALANCE SHEET."

I always find it useful to look at things and make "executive decisions."

Changing car insurance and going to a 1x/year payment last year saved our household $1400 last year. I probably let the other policy go on too long.

If I never looked at a budget, I would have never known to make this "big picture" decision rather than continually focus on the small stuff, like shopping at BJ's.

[MonkeyMama]

I prefer to do both. I think tracking net worth is very motivating, helps me look at the big picture, and a more clearer way to set and track long-term goals.

I am not a huge budget person overall. We do budgets during big life changes, or when we feel we are not meeting our goals. So I see value in them. But we generally set a budget and keep it in our head rather than track every penny. Then if we are not meeting our goals or want to do better sometimes we rework the budget.

I have found both methods pretty essential to getting ahead. We have always been big savers in general but I never tracked my net worth until this last year. It gives our budget so much more focus. We've never really paid much attention to the "big picture" before.

[disneysteve]

You can still be "on budget" but not increasing net worth.

Of course, you can also be increasing net worth and not on budget. If your investments are doing well, net worth could be rising even if you are overspending.

For that reason, I think it is important to do both. I, too, like to see my net worth climbing, but I still need to make sure I'm not overspending.

[Aleta]

I think that you get a more rounded picture when you do both. One is alloting and tracking your money and the other is to see where you are at any given time. They're both important but serve different looks at your money and finances.

[DayByDay]

I could never get a budget to work for us because DH's income and paydays vary so much. I've tried estimating our annual income and making up a budget from that, and it just never seemed to work. So I just continue to do what I've done for a long time, which is to use Quicken to keep track of everything and then pull up reports from time to time to analyze things and see where we might be able to cut back on our spending.

[Fern]

i don't do well with budgets, but i do track net worth and i do record every single iota of expense every month.

So no budget, but i always have a very good idea of what i've spent and where i stand. When you maintain a YTD spreadsheet of expenses, you can easily see where one month's expenses are excessive or under average.

[humandraydel]

Personally, I don't see a whole lot of value from tracking net worth. Don't get me wrong, it's necessary to establish net worth check points every 5 years or so. But the bottom line is that if you stick to a budget which properly allocates for savings, increasing net worth will follow.

[Broken Arrow]

This is just my personal opinion, but while I think both have their places, they indicate different things. One is used for the Big Picture while the other is for day-to-day operations. As such, I do both.

[Aleta]

In Joe Domenguez's book YOUR MONEY OR YOUR LIFE, he has several types of charts that I think most people here would appreciate. I can't go into fully; but he has one that shows income each month vs expenses on a horizontal scale and on the bottom shows another chart that lists your capital income that is generating income and that it will eventually cross over into your expenses and that is when you know that you are financially independent. I like his charts alot.

[Joel]

OK... so many of you do both budget and track net worth. In my mind the net worth is an overall picture as well.

My questions are:

1. HOW do you track your net worth?
2. What do you include?
3. What formulas do you use?

[Ima saver]

i do budgeting and tracking net worth, both each month. I use networthiq.com to keep track of my net worth. I include my house, other property, cars, cash in banks, stocks, bonds, mutual funds and ira's in my net worth minus my only debt, my car.

[disneysteve]

1. HOW do you track your net worth?
2. What do you include?
3. What formulas do you use?

I have a spreadsheet I made on my computer that lists all of our financial assets - stocks, bonds, funds, accounts, etc. I have it set up so I can download our portfolio values and plug them right in to update instantly. I just have to manually update our actual holdings, like how many shares of each fund we own.

The spreadsheet also has a section with our debts - mortgage and home equity loan - and I update those as well.

[skibo]

I do both, although my budget is more of a tracking tool than a planning tool - I find that the vast majority of my monthly $ goes to 'other' - but, I tend to slow down on the 'other' as I see the monthly total approach it's goal. For this I download my checking account activity and paste it into a spreadsheet every few days, where I can allocate each expense to various categories and total them up.

But, I don't see how net-worth alone can help me decide if I should buy the new dining room table - net-worth is just too 'big picture' to help much with monthly expenses.

For net-worth I also use a spreadsheet, where I total up the following:
-Current stock, fund & option values (non-shielded, IRA and 401K)
-Cash holdings (not counting checking account - only medium and long term savings accounts)
-'Cash-out' values of our 2 pensions
-Estimated value of our house, cars & boats, & a farm we own.

Fortunately, I don't have any debt at this time, or that would be in there too, of course.

I see some references are suggesting that your house value should not be included, but given the flexibility of home-equity loans and reverse mortgages, I'm not sure why that should not be in there with everthing else.

Anyway, I have the spread-sheet set up to auto-generate a pie-chart showing how the pile is divided amoung ~8 big categories, and a line-chart showing its value vs. time.

[Scanner]

Quicken 2004 allows you to track net worth although, it confusing to operate sometimes.