The last couple of days I’ve been playing with some different formulas for calculating what my net worth should be right now.  I’m looking for a goal to meet since having a quantifiable target makes it easier for me to put things in perspective with how well or how bad I’m doing.

I stumbled onto an article at The Simple Dollar that made me really stop and think about where I should be in my 30s.  A nice simple starter-formula was discussed that I think is a pretty good estimate for what a net worth goal should be.  Obviously anything higher than what this formula calculates would be great as well, but this certainly gets the brain thinking.

The formula discussed in the article is:

Target Net Worth = (Age - 27) X Annual Pre-Tax Income / 5

or with my actual values plugged in:

(30-27) X $80,000 / 5 = $48,000

48K?  Yikes!  Knowing my current Net Worth, it looks like I’ve got my work cut out for me.  Let’s put this goal in perspective with my current get-out-of-debt plan though.  Let’s plug in this equation for 5 years from now and assume a 3% annual increase (to be conservative):

(35-27) X $93,000 / 5 = $148,000

Phew!  Talk about a moving target!  What this essentially means for you is that it’s a much better idea to get on top of this as early as possible AND STAY THERE.  Getting behind from the beginning means you lose out on the compounding.  Even when I do get out of debt in the next 5 years (beside the mortgage) and start pumping the net worth into the positive values, I’m going to have yet another struggle to catch up to the values this formula calculates.

We’re talking a difference of about $20K/yr here for every year I’m just trying to get out of the negatives.  DON’T LET THIS HAPPEN TO YOU!!!  Learn from my mistake and hammer the debts down quickly so as not to get behind on the net worth potential.

So, are you above or below in net worth when using the above formula?  How did you get where you are?  How do you plan on catching up if you’re behind?  For anyone that’s ahead, how did you intend to stay there?  Share your experience and let’s get motivated to get rid of the debt so we’re not stuck chasing positive net worth from way behind the curve!

Recently I’ve managed to complete the first draft of our budget.  This was more difficult than  I thought, but not the mechanics of it.  The difficult part was actually deciding which things to not put in it!  The realizations you have to experience when creating your budget the very first time can just be life changing for some people.  Me being one of them.  So I decided to organize some of those eye-openers and share them with you.

1.  You can actually SEE whether or not you spend more than you make

This is pretty simple.  The budget is going to consist of income and expenses.  When you write all this down and put it in a real list, you can easily see if your expenses are higher or lower than your income.  Be warned!  Your first draft will not likely have everything that you ACTUALLY spend your money on.  (Thus the creation of my spend log to help keep track for future budget drafts.)

2.  You are immediately forced to think about how to correct problems if you have them

Spending too much?  Having made a budget will make you realize how much, AND help you identify where you’re doing things you shouldn’t.  Immediately after looking at the first draft of the budget with my wife, she began to prioritize some things that were left out over things that were included.  (That was actually GREAT!  She could have said everything was important and not been willing to compromise within the bounds of our income.)

We also talked about different ways to turn our spare time into more money.  Selling things on eBay, having a garage sale, picking up some more hours, etc.  All this came out only minutes after JUST SHOWING HER THE BUDGET!!

3.  You get a better idea of how you’re going to do in the long run

By creating the budget, we’re able to see how things are going to look for us a couple years out by simply expanding the spreadsheet a few more dozen columns into the future.  Everything too far off into the future is always speculative, but you can quickly see if the plan you’re making will likely have a positive result that you’re looking for.

In my case, the budget to the end of the year doesn’t show much.  My bonus income is not included because I get it in the Spring.  Also, the tax returns are not factored in.  (With 6 kids, it’s a rather large return at both federal and state levels.)  These normally catch us up on late bills.  Buy spreading out the budget and really following it, we may be able to apply those large amounts toward our current debt more appropriately instead of relying on them to pick up extra-expensive Christmas gifts.

4.  Newfound motivation shows itself

When I see a plan in place that may be the only thing that will keep me from having to literally uproot my children from the neighborhood they’ve grown up in or prevent me from having to take a better-paying job on the road or in another city…I want to execute it at all costs.  Sure, some people may feel overwhelmed at the sight of their budget.  Mrs. DebtBeater and I literally looked at each other with the same "we gotta do this…NOW" kind of look.  This is the kind of attitude and motivation that’s needed to get a debt mess cleaned up.  We’re ready for this, but only because we actually see this big massive problem that could drastically change our lives for the worst.

5.  It helps everyone involved come to the same level of understanding

As a team, my wife and I are going to have to make this work.  Sure she’s pretty much letting me just "do the budget" and let her know how much she can spend.  But by just LOOKING at the budget with me, she was able to understand what had to be done.  The ENTIRE FAMILY was going to have to get in money-saving shape.  I may be the only one crunching numbers, but she’s going to have to help by knowing when to say no to burgers at the drive-thru, or to the vacation plans, or to the dozens of fund-raisers the kids bring home.  We have to be in this TOGETHER or it’s just not going to work.

To conclude, I think creating a budget is a surefire way to kick-start any attack at getting out of debt.  However, more importantly it helps really get you organized and prepared for what’s going to be required to make things happen.  These are just the five main points I came up with after finishing a first draft of the budget, but I’m very interested in what immediate advantages you all found when you first took the plunge and created a detailed budget.  What did you do right after you were done?  What attitude changes did it bring up?