This is the seventh part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “5 Accounts, #5 – 401(k)“.
The next article is “Financial Tools: Budget Tracking/Planning“.

Apologies for the slight hiatus – one day I’ll find the “sweet spot” combination of lifestyle, organisation and motivation to write on a regular schedule. Until then… sporadicity rules…

Last time I posted on personal finance, we wrapped up my summary of the 5 types of account I think I’m going to need for my nascent plan.

With that done, it’s time to look at the tools we’ll need to build and execute that plan.

Today, it’s the turn of the Net Worth Tracker and Planner.

What’s a Net Worth Tracker?

Put simply, a Net Worth Tracker is a spreadsheet, website or application that you can use to track your Net Worth. I like to think of it (somewhat macabrely) as the sum total your beneficiaries would get if you accidentally fell off a cliff tomorrow.

Your “Net Worth” includes every major financial balance in your life – the value of any cars, the equity you have in any homes, the sums of your retirement accounts, savings, checking accounts, wallet, investments and so on; as well as your debts – credit cards, loans, mortgages, etc.

A Net Worth Tracker is an invaluable tool in getting a better grip on your finances because it’s a (maybe sunny, maybe brutal) “quick sweep” overview of your current financial health, and a great way, by filling it in week-to-week (or month-to-month) of reviewing progress towards your financial goals, or seeing the effects of missteps.

How do I build a tracker?

Since I’m lazy, I’d say that the best way to go about building a financial tracker is to use a spreadsheet, and to follow Trent’s instructions over on TheSimpleDollar (which I seem to keep pimping here. Nevermind.)

The rest of this post will make less sense without the context of that one, so go read it now. Trent covers the basics very well, and following his suggestions will get you a basic net worth tracker which is highly useful.

My own practice deviates somewhat from his, though, in two key respects:

(1) I have two trackers – one monthly one (exactly as Trent describes), and one weekly one which, whilst fluctuating quite a bit with the vagaries of rent cheques and salary deposits, keeps me very close to what my money is doing.
(2) I also have a “planner”, which actually lives in the same spreadsheet as my weekly tracker, and follows the same principles, but is projected forward to encompass what I should be doing with my money over the coming year or so.

Making Projections

To build my net worth projections, I have a bunch of extra fields in my “projector”, besides the usual account balances. I have rows to cover paycheques in, payments to various debts, “other income”, rent payments, and weekly expenditure – food, small bills, entertainment… (which I set as an estimated average constant).

My “net worth” projector then becomes a set of formulae taking these money movements into account – for example, the weekly checking account balance becomes [previous balance] – [weekly expenditure] + [paycheck] – [loan payments] – [other expenditure] – [movements to other accounts].

You can also automate other balances with formulae – “Auto loan”, for example, becomes [previous Auto loan balance]-[Auto payment]. If you participate in an employer’s ESPP program or 401(k), you can set up a formula which will increment the value for each week where a paycheck is present.

Once the formulae are set up, I can easily work out the effects of different financial decisions by just changing the amounts in the “in/out” boxes, to come up with an optimum plan for saving, investing and debt repayment.

Stock options (and other investments) can provide something of an uncertainty – they’re subject to movements which are (relatively) unpredictable. For these, I look at the past year’s trend and calculate the value accordingly (so if your investment portfolio gained 8% last year, use that.)

This will give you the “bones” of your financial plan. For rows which aren’t automated, I generally fill them in with a formula which is simply “=[previous column]“. This way, as you decide on the structure of debt payments, for example, you can just alter the relevant columns, and the balances in between will remain.

Now is the time to do that. Look at your debts (particularly those without a structured repayment plan), and your checking/savings balances as the plan predicts them. Wherever you have “spare” money, you should look to insert a payment into the plan, reducing your account balances and your debt load. Once the “Debts” line on the sheet hits zero, things get really fun – you can start taking the money which was going into debt repayment, and push it instead into other accounts. First off should be your Emergency Fund, then any possible increase in 401(k) contributions; finally, you can start building up an investment account.

The advantage of this is that I’ve now done the bulk of my financial planning work for the next year. Every few days I check in with the planner and see where I should be with money movements, repayments and so on. It’s a no-brainer. When the plan says to pay down the auto loan, I pay the damn thing down…

I also build 2 graphs from this spreadsheet – one mapping my actual balances, and incorporating the “net worth” line from my planner (this way I can see, week on week, if I’m meeting, exceeding or falling behind my goals) – and one which maps the entire plan (because looking at how it should pan out motivates me to make sure that it does.)

And that’s the real key here – as well as being a useful blueprint to follow, ultimately a planner is a massive motivator to make the right financial choices, day in, day out.

Once you get it down, it gives you a real, solid feeling of power over your money.

Disclaimer: I’m not a financial advisor, and I’m just sharing my own financial plans because, well, I like to share. It’s also a good exercise in “thinking out loud”. You choose to follow any advice in these posts at your own risk, though – I’m not responsible if you overdraw or suffer other financial calamity…

The “Money” photo on this post is from Monochrome on Flickr.

This article first arrived on the interwebnet on Thursday, September 20th, 2007 at 11:07 pm .
It's arbitrarily categorised as being about: Finance, Financial Planning, Thinking.
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You know, this article used to be 4000 words longer, but right before I pressed 'Save', the dog ate it. Honest.