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'Net worth is nice to track,' says CFP, but if you want to build wealth, pay attention to this first

"I am much more interested in seeing your cash flow statement than I am your balance sheet."

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Key Points
  • Tracking your monthly cash flow can be more helpful than knowing your net worth, says CFP Peggy Doviak.
  • Cash flow is your income minus your expenses, or whatever money you have left over after you've paid your bills.
  • The first step is knowing your numbers and confronting your spending habits.
  • Next, take small steps to spend less and earn more, so you can pay down debt, save and invest.

If you were lucky enough to be in this bull market, you'll likely be feeling pretty good as you look at your financial year in review. All three major U.S. indexes made big gains this year: From their close on December 31, 2020, to December 15, 2021, the Dow, Nasdaq, and S&P 500 rose 17%, 20%, and 25%, respectively.

But when the getting is this good, there's one key metric of your personal books that's often get overlooked, says Peggy Doviak, a certified financial planner and founder of DW Wealth Management in Norman, Oklahoma: Your cash flow. Cash flow is your income minus your expenses, or whatever money you have left over after you've paid your bills.

"Net worth is nice to track," Doviak says. "It's nice to see your progress, and it's nice to see your debt getting lower. But if I can only see one thing for you, I am much more interested in seeing your cash flow statement than I am your balance sheet."

The reason is simple: You have control over your own spending and can modify it as needed to better achieve your goals, regardless of what's happening with markets. "I am convinced that people live and die by their cash flow much more than their net worth," Doviak says.

And December is a great time to review your cash flow. "It's probably the least interesting month of the year to try to analyze your spending," Doviak says, but if you do it now, when January comes and everyone else will be making "financial New Year's resolutions, you've already done all the heavy lifting."

Here's her best advice.

'Don't be afraid' of facing up to your spending habits

Step one in making a clear-eyed budget for the new year is to forget any fear or guilt that you might have about how much money you've spent in the past, Doviak says. "There is no shame. I don't care if you've got $50,000 of credit card debt, or $100,000 of student loan debt that was spent mostly on beer, pizza, and a trip to Europe," Doviak says. "Because when you feel guilty about it, then you feel bad about it, you don't want to look at it, and you can't make good financial decisions from a position of fear."

So if you're one of those people who only has a rough idea of your debt total and are automatically making payments without actually looking at the numbers, open up those envelopes and break out your calculator.

As painful as it might feel at first to face the numbers, it's much better to know specifics like how much you owe and at what interest rate. "Don't be afraid of it," Doviak says. "It is what it is, and not looking at it isn't going to change it."

'You don't have to do it all on Tuesday'

Once you've crossed that first hurdle, the next thing to know is that you don't need to make the ledger of your cash flow all in one sitting, Doviak says. Start small, say, by tracking one account. Take breaks when you need to. It's okay for the process to span a few days or even weeks.

"I want you to create a detailed analysis of your spending, but you don't have to do it all on a Tuesday night," Doviak says. "If somebody told me in the next two weeks, 'You need to write down everything you spent last year,' I can't get it done that fast. I have other things I'm trying to do."

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Instead, consider breaking it into manageable steps, reviewing one account or category at a time. Dedicate 30 minutes or an hour to making your ledger each day.

"I have a trick for cleaning house and doing other tasks that I absolutely despise," Doviak says. "I watch my very favorite television show, and then during the ads I get up and work. I can get a miraculous amount done in an hour."

Not everyone can be productive like that with the television on, but the idea is to make the task seem less onerous. You can set the goal of tackling one month of spending per sitting, Doviak says: "Just spend about 30 minutes a day on it."

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Avoid 'draconian' resolutions to spend less money

Once you've made your ledger, you will have a good understanding of your essential and discretionary spending in 2021. Or, as Doviak puts it, money for bills you have to pay and money you use for fun stuff.

Now you're in a great position to start setting reasonable and achievable goals for the new year.

If your New Year's resolution is to save more, you can adjust your discretionary spending as needed. And "those adjustments don't have to be draconian," Doviak says. "You don't have to look at your monthly set spending and say, 'Well, I'm never eating out again, or I'm never going to go out with my friends again.'"

You don't have to look at your monthly set spending and say, 'Well, I'm never eating out again, or I'm never going to go out with my friends again.'
Peggy Doviak
CFP, DM Wealth Management

Instead, Doviak suggests using the same principle of breaking the task into manageable steps when you made your ledger to making small goals. Look for ways to spend smarter on both essential and discretionary purchases, such as comparison shopping for auto insurance or snaring discounts for buying some groceries in bulk. Scale back on fun purchases, rather than starting out by eliminating them completely.

"Think of it more like Weight Watchers or Alcoholics Anonymous, where it's a lifestyle rather than crashing off 30 pounds in a month, because you can't live that way," Doviak says. "When you look at that cash flow, you have to keep some [discretionary] spending money in it."

It should be "livable and workable," she says, because if you tighten the belt too much, you run the risk of buckling more quickly and ending the experiment altogether before you give it a chance to really start working.

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