Our next step of the 100 steps mission to financial independence is to set yourself a goal for what you would like your net worth to be in six months. This gives you an excellent target to work towards to during the mission. Although you’ll probably find that your net worth doesn’t change dramatically in this half a year, 6 months is a good time frame to start with as it is long enough to see substantial changes and the effects of goal setting, yet short enough not to forget about it or lose track.
You can set yourself a goal for your net worth by either stating a specific amount, or alternatively by setting a percentage by which to increase your income. If you set a specific amount as your target and keep that the same every six months, with time as your net worth increases and as it should become easier to achieve the same target, you might not be achieving as much as you could. Alternatively, if you set yourself a target of certain percentage increase it means that your net worth target increases more as your net worth itself increases.
For example let’s imagine your current net worth is $25.000 and you set yourself the goal to increase it by $5.000 in 6 months by paying of debts, your mortgage and saving money. Now say that in 6 months you have more or less exactly achieved your goal and your net worth is now $30.000. You keep setting yourself the same goal of increasing your net worth by $5.000 every half a year. After 5 years your net worth would have increased to $80.000. It makes sense that with that increased net worth (most likely due to having less debts and therefore interest to pay off, more savings or investments with interest generated etc.) it is a lot easier to keep increasing it with $5.000 per half a year than when your net worth was “only” $20.000.
If you instead set yourself the goal of increasing your net worth with a certain percentage, that means that with time you also increase your net goal accordingly. Say that your net worth is again $25.000 at the moment you start, and you set yourself the goal of increasing it by 20% in 6 months. You’ll see that for the first 6 months, the net amount to increase your worth with would be the same: $5.000. But after those first 6 months, as you now have $30.000, 20% is no longer $5.000 but $6.000. Obviously you can always adjust your targets and switch from one to the other, but it is worth noting that with time, your targets will probably change as well.
Step 7 – Set a net worth goal – in detail
- Look at your current net worth as the starting point.
- Make a rough calculation of how much of your debt you already pay off each month. You have to be careful here, as even if you pay $750 monthly to your mortgage provider, that doesn’t mean your outstanding balance goes down by $750, as part of what you pay is interest that you are paying (more on that later!). So find out how much of the core debt you are paying off per month.
- If you are increasing any assets on a monthly basis (investments, savings money, pension contributions), estimate how much you roughly add per month.
- Total how much you decrease your debts and how much you increase your assets on a monthly basis and multiply the total by 6. This is how much you should expect to increase your net worth in 6 months’ time, providing you don’t add any other debt or don’t have a decrease in your assets.
- For example, say your current net worth is -$30.000, you pay $200 towards your student loan provider on a monthly basis, of which only $170 goes to the loan, the remaining $30 is interest you are paying off. You also put away $50 into a savings account. That means that in six months time, you expect to have paid $1020 towards your loan (the $30 x 6 interest you pay doesn’t count), and you should have added $300 to your savings account. That means that your net worth would have increased to -$28.680.
- Set a realistic target and make sure that you make it challenging enough but at the same time don’t make it too difficult. If your current net worth is $5.000 it is probably not realistic to think you can get to $100.000 in 6 month’s time. At the same time, setting yourself the goal to get to $5.100 might not be very challenging either.
- In your calendar mark the date in exactly 1 month’s time to recalculate your net worth again.Do the same for 2 months, 3 months, etc. until 6 months.
- In 1 month, recalculate your net worth by listing how much your assets and liabilities are worth at that time and subtracting the liabilities from your assets. If you are not on track to reach your net worth goal, see if you can make any adjustments to your spending patterns to get back on track. Alternatively if you find that you are well ahead of your target, see if you might want to set yourself a higher goal.
Don’t worry if you feel your goal is a little bit of a wild guess, with time this will become more accurate, especially once you’ve had a better look at your expenses and income patterns (in future steps). For now the most important is that you have at least thought about the evolution of your net worth and that you have set yourself a goal, and with time this can be perfected.