Validation that you’re heading in the right direction

Some 10 years ago, I can recall using my net worth to verify that we were on the right path with our finances. Back then I included my home appraisal and mortgage debt into that calculation. I think that at some point in time, everyone may need validation that you’re heading in the right direction. It was somewhat beneficial because we got from negative net worth (yes, even including house appreciation), to a net worth of $0. I can honestly say I was thrilled about that as I was seeing it in a “vacuum”. But while our net worth was increasing, we were also slowly increasing our debt load. :-(

Move forward about 10 years, and our net worth returned to virtually zero. Why? Well, because we simply were saving literally nothing, while putting decent focus on paying down debt. I admittedly am the one who handles the budget in our household, although I do discuss our finances with my dear wife. I also allowed myself to feel a sense of being ok with unplanned spending being put on credit … DOH!.

Needless to say, that was NOT a very good plan! In an attempt to control some of the overspending, we went to using cash only for some purchases, along with starting to fund a retirement account through my paycheck after only 1 month of seeing that we could make it with the lower spending in other areas of our lives. Luckily I had also started this just prior to 2011, when legislation was signed into law which let people keep 2% of their income that would have gone toward Social Security as part of the tax relief act. Essentially the gov’t wanted people to spend that money to kick-start the economy. The rate of 4.2% hasn’t been seen in SS taxes since 1969-1970, aside from those income earners who make much more than the SS cap (currently in 2012 it is $110,100/yr).

That lowering of SS to 4.2% to me simply meant that I’d shift 2% more into my pre-tax retirement account since it was not even close to being maxed out. After all, it was already going to come out of my paycheck anyway and I thought: “What a better way to keep my taxable income unchanged”. Then of course the reduction was continued throughout 2012, which simply benefited the 401k and increasing our overall net worth via further savings.

Some folks such as Financial Samurai do not (or possibly did not) consider counting their 401k in their net worth calculations. In fact, Financial Samurai has a different term for what most of us would consider net worth, that is wealth number.

Will I ever use house appreciation vice mortgage in our net worth again? I really don’t see a reason unless someone like a banker would want to see that for some reason.

So, I guess this is my way to open up about my own mistakes and adjustments we have done regarding our finances. And it is now a positive number somewhere above $10,000 for a couple of months. My goal is to get that up as high as I can of course. Quicken will let me add house appreciation/mortgage easily if I really want to include that in my net worth, although that is not how I have it set up on the initial account page within Quicken.

What (if any) mistakes have you made regarding your finances?
Even more importantly are you, or have you, done anything to fix those mistakes albeit even in a small way?

PS: If anybody wants a prediction, the 2% SS payroll tax will be reinstated, and very likely the payroll cap will be moved up to $200k or so, where the current POTUS (Obama) and Republican candidate (Romney) seem to feel comfortable stating that is about where the line is for the middle-class.

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6 Responses to Validation that you’re heading in the right direction

  1. Arvind says:

    What liberating knwoldege. Give me liberty or give me death.

  2. BTW, congrats on moving in the right direction. It really is about progress!

  3. I don’t know if the SS tax will rise to normal again. I think we’re still in pretty sensitive situation and no new taxes will occur.

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