8 Lessons from 8 Years of the Best Financial Habit
I could pinpoint the exact second when I lost my audience. I wasn’t surprised because it was the same spot I lost the audience the last time I gave the talk. And the time before that.
I’ve presented some version of “The Two Most Important Financial Habits” dozens of times and through a combination of self-deprecation and unexpected profanity, the audience typically stays engaged through Habit #1 (learn how you are spending your money and how to make it meaningful to you) and most of Habit #2 (track your net worth).
But then I drop the buy-in destroying atomic bomb:
You should track your net worth every day.
These magic words shift the collective consciousness of the audience from “this guy might be onto something” to “this guy is obsessed with money and it’s starting to creep me out.”
Live shot of the crowd’s reaction to the magic words.
If I keep getting the same results, why do I stubbornly continue to dig in my heels and refuse to offer different advice? Because I believe in my bones that this habit can dramatically improve nearly everyone’s relationship with money and their financial well-being!
I started recording my family’s net worth on 5/13/2015 and I haven’t missed a single day except when I took vacation. The first 10 minutes of every workday looks exactly the same: Log into my PC, open my Financial Tracking file, go to Empower.com, and update my net worth.
Here are 8 things I’ve learned from this daily ritual over the past 8 years:
#1. It is scary to confront the truth, but the fear of the unknown is worse
The first step to improving anything is understanding where you’re starting from. To map the path to where you want to be, you must be clear about precisely where you are. For your finances, this means adding up your debts, stacking them against your assets, taking a stiff drink, and then looking at the bottom line.
I can’t promise that this won’t be a bitter pill to swallow but I can promise that knowing the truth about reality is far more useful than walking around with a vague-to-severe sense of anxiety about your financial situation. Anxiety blinds you from the path forward and prevents meaningful progress.
#2. Celebrating little victories is crucial
One of the three cardinal rules about habit formation is to Make It Fun. Finding ways to reward yourself for consistency and to celebrate milestones makes new habits far more likely to stick around.
Whenever we hit a new net worth high, my wife could count on receiving a silly money related gif. When we hit larger, round-number milestones, we celebrated with fancy family dinners out.
#3. use Technology to bring order to chaoS
Another cardinal rule for habit formation is to Make It Easy. There is no way I would have kept up with daily net worth checks if it required more than just logging into Empower (a free net worth tracking app) and recording the number in the upper left corner of the screen.
The idea of pulling together all the details of your finances can feel like an impossibly complex challenge, but technology makes it much easier for us than it was for our parents. Devote one afternoon to gathering (or resetting) all your financial account usernames and passwords. Once you enter these into Empower (or Mint, which is similar and also solid), your net worth will update automatically.
#4. No one knows what the hell is going on, including “investing experts”
A few years ago, I decided to google “S&P 500” a few times per week and copy down the top search result. I wanted to see if any of the top-line stories or predictions about where the market was going were accurate. Here is a representative sample, which I’ve dubbed “The Ballad of the Bear and the Bull”:
Fall 2019: “Chart analyst warns S&P 500 ‘cruising for a bruising’” (Bear)
Two days later: “New highs are in store for the S&P 500 this year according to this chart.” (Bull)
One month later: “The S&P 500 bubble is coming: What now?” (Bear)
Two months later: “Dow, S&P, and NASDAQ surge to new records.” (Bull)
Three weeks later: “The Bubble: Bigger, Fatter, Uglier” (Bear)
5 days later: “Charting a bullish reversal, S&P 500 extends spike from major support.” (Bull)
That very same fucking day: “Stocks headed for a 67% downturn?” (Bear)
When it comes to predicting what will happen in the market, don’t trust the expert you see on TV, your financial advisor, or your brother-in-law who works for a hedge fund. No one knows what will happen next. Just keep investing in boring, passive index funds.
#5. Choosing what to measure is more than half the battle
One of the most overwhelming things about trying to get your finances under control is deciding what to pay attention to. If I could only pick one thing to track, it would be net worth because it gives you a holistic picture of your entire financial situation. It’s tempting to focus on income, but there are countless examples of people who make a ton of money and still live paycheck to paycheck.
The other two metrics we focus on are savings rate and something nerdy I made up called the Joy Index.
Savings rate is helpful because keeping it fixed slows the increased spending that inevitably comes with increased income. It also determines how long you have to work before reaching financial independence.
The Joy Index helps us minimize mindless spending by maximizing mindful spending. My wife and I each have a few things we love spending money on and the Joy Index = spending on those things as a percent of our total spending.
#6. It’s a slog, but eventually the flywheel works in your favor
I never thought I would maintain this habit for a full year, let alone eight years. But something surprised me after the first few months. After I noticed that things were trending upwards, I caught a glimpse of how sticking with it could develop meaningful momentum. This is how truly transformational habits work. You put in the work, day after day, and eventually the system starts working for you rather than against you.
Eventually you put enough money away that when the market has a good year, your investment gains exceed what you saved. Then a few years later, your investment gains exceed your annual living expenses. Then eventually, your investment gains exceed what you made from work.
#7. Progress is the best source of motivation
One of the great things about tracking your net worth is that it makes progress visible when it feels like you’re financially stuck.
Maybe you haven’t gotten a meaningful raise in several years and the market has been throwing a slow-motion tantrum, so your savings and investments haven’t budged either. It would be easy to convince yourself that it was pointless to try to improve your finances, with so many barriers standing in your way. But if you have debt like most of us, every payment you make on that debt increases your net worth. This meaningful progress would be invisible if you were focused only on your income or the size of your portfolio and progress is what keeps us striving to meet difficult goals.
You are Sisyphus and the boulder is the last $200 on your Lowe’s 18 months same as cash account.
#8. The best way to stop obsessing about your finances is to review them every day
Everyone thinks about money every day. Sometimes it’s only for a few seconds but on some days it occupies more of your headspace than anything else. If you’re going to think about money every day, why not do it as part of a conscious plan? This will train your brain and your subconscious to stop endlessly cycling back to the topic when you are trying to focus on other things.
As an added bonus, it turns out that if you want to improve something, you should measure it every day. Research supports daily weigh-ins if you’re trying to lose weight so if you’re trying to improve your finances, you need to establish a daily check-in.
To close, I want to highlight one big thing that I haven’t learned squat about over these past 8 years: I don’t know anything about how I will respond to financial hardship because my interest in personal finance happened to coincide with a historic bull market. This was 100% dumb luck.
In the 8 years that I’ve been tracking our net worth, we’ve had 554 separate net worth highs, which is an average of a new high every 5.3 days. The longest gap between two highs was just over 7 months, which is basically nothing in the grand scheme of things.
Those results are phenomenal, but I won’t let them trick me into thinking I’m an investing wizard or that I should quit my job and start day-trading. The single biggest factor in the success we’ve had is that the American stock market had a historically strong run from 2015 to 2023.
If you’re at all familiar with investing history, you know that it’s an inescapable fact that the market will take a serious dive at some point in the future. Maybe next week or maybe not until 2030, but it will get walloped and almost everyone will start to lose their shit. Tracking my net worth every day has taught me enough to hopefully not be one of them.