The Matrix

So, how do you know if you're on the right track? You're working hard year in and year out and don't seem to be getting anywhere. I've developed a very simple matrix to help you know if things are going in the right direction.

There are two simple questions you need to ask yourself at the end of each year:
1. Has your total debt gone down?
2. Has your net worth gone up? Net worth is your total assets less your total debt. Please see my previous post about what an asset is.

Here's what the matrix looks like:












This is going to give you a real easy, quick check of how things are going financially.

The top left box is the sweet spot and indicates real financial progress. If your net worth went up and your debt went down you are doing great!

The top right box is more of a caution area. Your net worth went up, which indicates your investments did well, but your total debt increased as well. This could indicate a large purchase that you financed with debt, like a car. If your debt is increasing every year, you need to reassess your lifestyle because if your investments enter a bear market, you will quickly move into the big red box right below.

The bottom left box is also a caution area. If you're in this box, that means you've done a good job paying down your debts over the past year. Unfortunately, it appears that you are in a bear market because your assets are also going down in value. In this case you need to review your investments and make some changes there, but there's not much else you can do.

The bottom right box is the worst spot you can be in if you ever hope to achieve financial success. In this case you are in the worst of all worlds - your net worth is decreasing and your total debt is increasing. Ironically, you could be in this space even if your investments are increasing in value, but your debt is increasing even faster. If you are in this box you need to seriously reassess your entire lifestyle and make some changes quick because everything is going in the wrong direction if you ever want to achieve financial success.

Now, from personal experience I can tell you it is almost impossible to stay in the green box year in and year out. S*#t happens. You need to buy a new car or there's a bear market. However, as long as you're making progress on one of those two fronts and try to hit the green box every few years you'll be on the right track.

Because I'm an obsessive/compulsive I've been tracking this every year since we purchased our house back in 1998. Here's what it looked like for me:

1998: Net Worth Up; Debt Up (I purchased a home and a car)
1999: Net Worth Up; Debt Down (Score!)
2000: Net Worth Up; Debt Up (we started a new business for my wife)
2001: Net Worth Up; Debt Down (Trip #2 to the green box)
2002: Net Worth Up; Debt Down (3 our of 5 years in the green box)
2003: Net Worth Up; Debt Down (On a roll for 3 years in a row!)
2004: Net Worth Down; Debt Up (Danger zone, we bought a new car. Luckily the net worth only went down by about $200 when compared to the previous year)
2005: Net Worth Up; Debt Down
2006: Net Worth Up; Debt Eliminated! (We sold our house and paid off all our debt)
2007: Net Worth Up; Debt still at zero.

So 7 out of 10 years in the green zone, not bad. Please keep in mind that there were years my assets went down in value (like the 2000 - 2002 bear market), but I was saving money and paying down my debts so both those items helped my net worth. 2004 was also a tough year as our business income was down, we couldn't save as much and we purchased a new car. This caused our net worth to decrease even though our assets were increasing in value that year.

So, the New Year has just started and you can start to assess where you are. Use this matrix to make sure you are on the right path!