Friday, August 1, 2008

Using the Numbers for Motivation

Sticking with frugality sometimes gets a little wearisome. Whether it's trying to live or eat on a small budget, or trying to come up with money to pay down debts, living frugally is a long term game for most of us. I think I have it easier than most people who are drawn to read or write about frugality, but I still look for ways to keep myself motivated. I'm really not a math buff at all, but I have found ways of using numbers to motivate myself.

Recently I've seen several personal finance bloggers who freely share monthly updates on their personal net worth, or their debt load, or both. I think this is brave of them, but from my perspective it can be a little dangerous for their readers. The temptation, of course, is for the reader to compare their net worth, or debt load to the the blogger's reported figures. This can take them down two equally detrimental paths. Either the reader is better off than the blogger, and feels a little smug; or the reader is in much worse shape financially than the blogger, and feels depressed or hopeless about his or her situation, and possibly envious of the blogger. Neither of these reactions is useful for the reader who wants to maintain a frugal lifestyle. In my experience, comparing one's own financial situation to someone else's is rarely profitable.

On the other hand, the benefits to the blogger are obvious. Making a practice of posting a monthly or quarterly update on your own finances is a good discipline that will, one hopes, keep you honest with yourself. The key difference here is that the bloggers are comparing their current financial state to their own previous financial states. Comparing yourself to yourself is extremely useful as it lets you track progress and can provide plenty of motivation. Monitoring your finances in this way also makes it much easier to set a series of short term goals, increasing your chances of reaching your overall goal sooner.

But I'm going to take the argument one step farther than that. If your finances are such that your assets include stocks, your net worth is subject to the rise and fall of the stock market. And there's almost nothing that you can do about that other than invest as wisely as you can. So my suggestion is to watch that number, but largely ignore it for the purposes of a monthly or quarterly calculation. Leave it out of your calculations altogether. Instead, focus on your total debt. That's the number that you have the most direct control over. If you're living within your means and practicing frugality, that number should, barring something like a house purchase, always go down. The lower the number, the better you should feel.

If your income and living expenses are relatively stable, over time the month-to-month reductions in your debt should get larger and larger. I remember when I was in my early twenties and I decided to get out of credit card debt that I actually looked forward to making my monthly payments. Because it meant that my balance was going down, and that next month I'd be racking up less owed in interest. I feel the same way now about our mortgage. I feel good when I'm able to scrounge up a few extra dollars to send off to our lender, no matter how small the amount. Getting to nothing owed on my credit cards felt FANTASTIC. I think it'll feel even better when we get to that point on our mortgage.

So set up a simple spreadsheet for yourself, and create a graph that shows your total debt going down, down, down. When you feel like you've had it up to your eyeballs with frugality, or when you look ahead and see only years of obligatory financial discipline in your life, turn back to that graph and think about the progress you've already made. Your actions, and efforts, and way of thinking about money have already made that much of a difference. Each payment you make cuts down on the interest you'll pay in the future. Remind yourself that steady progress is real progress.

For extra motivation, run some additional calculations. Keep a separate graph of the amount of interest you're charged each month. Or see how much more of your standard payment is being applied to principle from month to month. You can watch those numbers shrink or grow for extra cheer.

4 comments:

Claire said...

I think you're absolutely right. I had been tracking our entire net worth, but my husband kept saying, "Why bother tracking our retirement accounts? We have at least 30 more years until we're going to use them, and it's not like we'd even consider accessing them, so just track our cash and debt." So that's what I've mostly been doing; I love to see the percentage change each month.

Bonnie said...

Hey,
Just wanted to say that I really enjoy your blog.....I have recently started canning myself. Also, you are slowly inspiring me to plan a garden for next year. Thanks!

Kate said...

I agree, Claire. While I think it's important to fund retirement accounts, for me it's best if that money just goes into a figurative black hole. Maybe it's worth tracking on an annual basis. But the month-to-month fluctuations in the market are too big for my taste. If the market takes a bath, my net worth can go down no matter how good my practices, and that's just too depressing for me. I need to see "progress" every month.

Maybe I should have titled this post "How to Lie to Yourself With Numbers."

-Kate

Kate said...

Hi, Bonnie. Thanks for stopping by and leaving me your kind note. I'm pleased to hear you're thinking about a garden. Right now, in mid-summer, I could easily turn this into a gardening and cooking blog. I've resisted the impulse. But maybe I shouldn't. I've been thinking about a post on garden planning anyway. The planning stage itself is a pretty important and enjoyable one. I've made lots of mistakes in garden planning over the years. This year it was overstocking the garden with too many plants.

I'd love to hear more about your canning adventures.

-Kate