In an effort to control personal finances, many people focus on three common goals: cutting spending, reducing debt, and saving more. In a Q&A with James W. Stone, author of "Spend Joyfully," he says the way to measure progress toward that goal is to monitor your net worth.
In an effort to control personal finances, many people -- physicians included -- have focused on two things: cutting spending and reducing outstanding debt. Both are essential goals. A third common goal is to work hard and accumulate wealth that will sustain them later in life, according to James W. Stone, author of “Spend Joyfully.” The way to measure progress toward that goal, he says, is to monitor your net worth.
Below are excerpts from an interview with Stone where he discusses this important strategy.
PMD: Why is it important to monitor your net worth?
Stone: The biggest reason for that, in my opinion, is that it tells you where you are. Knowing your net worth tells you where you are in your life plan. If we have an idea of what we want to do in our life, then there’s going to be a parallel to that that’s defined by our finances. It’s very much like driving along the interstate and watching your fuel gauge as you watch the mile markers. You want to know that you have enough fuel to make it the rest of the way. By watching your net worth … you’re trying to fill up your tank so you can coast downhill the rest of the way.
PMD: Do many people fail to set up goals and monitor their net worth?
Stone: I find that to be very true … that people fail to set up goals of what they want to do in their life, or the milestones they need to achieve along the way. I find this true in those who lack education, as well as those who’ve gotten all the way through MDs or PhDs. They’re living in the moment, and I think our entertainment and culture in general tends to promote doing that.
PMD: Do people make errors in determining their net worth, such as not taking into account what they owe on a mortgage?
Stone: Constantly. There are a lot of ways that your emotions can trap you into forgetting an obligation and not including it. I’ve seen people try to figure out their net worth and not include their student loans, or their mortgages, or they try to include the value of a car when in fact it’s on lease, and they have no value in that car. But most of the things that we’re trying to figure in do have a firm value. That would be money in a retirement plan, or even just an after-tax CD, or your stock portfolio … there is a generally accepted market value for that. And the rest of it is just remembering that there are a lot of crumbs on the table that you also have to include.
PMD: What do physicians tend to forget when calculating net worth?
Stone: One of the things that I find with physicians is that they tend to look at their medical practice as being part of their personal value. They will look at all of the equipment that they’ve purchased for their practice, x-ray machines, computer systems, and such. They tend to look at it as either an asset, or the bills from it as a personal liability, because that’s the way it’s handled on a tax basis. But in fact, these things are separate from your personal net worth. You should take all of the aspects from your business and look at it as your business. Then in your net worth you can say your business is worth this much, or it’s actually a liability of this much.
PMD: If physicians find themselves in a situation where they have negative net worth, what can they do to remedy the problem?
Stone: Reversing negative net worth is the same thing as finding a way to save money. If you’re putting money in a savings account, that’s building your net worth. Anything that moves your net worth into the positive direction is the same thing … whether you’re reducing a negative net worth or increasing a positive net worth. So, it’s which way are you moving the needle.
PMD: So, to begin measuring your net worth, physician need to sit down, add up their assets and debts, honestly assess what they have of value, and then use that figure to measure it against their goals?
Stone: That is how you get to the number. It is that simple. But then that’s like saying in order to see, all you have to do is open your eyes. What do you see, and what does it mean? Once they determine their net worth, they have to figure out what that means and compare it with where they are in their lives, their life plans, their goals. Physicians are constantly looking at patients to determine whether they need to make a change in their lifestyle. This is physician, heal theyself; look at your net worth and figure out what, if anything, you need to change.