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Trent, over at The Simple Dollar, has a very interesting post up regarding net worth. He looks at how to move from having a budget mentality to developing a mentality that focuses on net worth. This got me thinking about the differences between making a budget and focusing on net worth.
Budget v. net worth
While a budget can be a useful tool, it is important to note that a budget is really more about teaching yourself to be disciplined and to look seriously at your cash flow. The idea is to try an set up a system where you are living within your means. But it really doesn’t do much in terms of advancing your wealth because it focuses you on the minutae of your cash flow and your expenses.
When you focus on your net worth, you are looking at what you have now, in terms of assets minus your liabilities (debts and other obligations). This means that you can get a snapshot of where you are at in terms of building wealth. When you have a net worth mentality, you focus on creating goals that will help you increase your wealth (which is not the same thing as income) and/or decrease your obligations.
The idea is to set goals that will allow you attain financial freedom with wealth, rather than merely managing your resources with a budget.
What financial goals do you set for yourself?
image credit: Oxxo
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I agree. I think a budget can be a good first step to financial management, but you do have to move on if you want to find success in a world with job changes, doing something active beyond retirement and an array financial options for making it all work.
I totally agree. The “budget mentality” just perpetuates the now-ancient mindset of working for 30 years and then retire to grow vegetables.
People now have to be much more sophisticated with their finances in order to advance if they don’t want to get stuck in this trap.