Tracking Your Financial Progress
Posted on October 13, 2006
When I first entered the workforce, like most young people; I got a job, went to work, received a paycheck, paid my bills and didn’t have a clue whether I was getting ahead or not. If I had money left over I usually found something on which to spend it and then looked forward with anticipation to my next paycheck. I was renting when an unusual opportunity presented itself that enabled me to buy my first home. My next door neighbor’s misfortune turned into my good fortune. He had an unfortunate situation arise that put him in dire financial difficulties, which caused him to have to sell his home quickly.
He saw me in the yard one evening, explained his situation and asked if I would like to buy his home. He said the bank was about to start foreclosure proceedings and if I would give him $500 and assume his mortgage he would let me buy the house. (That was back in the 1960s before the advent of the �due on sale’ clause in mortgages.) He explained that this would get him out from under the debt and help him salvage his credit.
I was a total greenhorn when it came to buying real estate, but with help from some family members, I was able to come up with the $500 plus closing costs and I bought the property. Because of this transaction, I inadvertently learned some very valuable financial lessons. The first was at the closing when the attorney went over the note and deed of trust documents, had me sign everything and then handed me an amortization schedule for the loan.
I looked at it, turned to the attorney and said, “What’s this?”
I’d never seen an amortization schedule and didn’t know what it was. The attorney explained that it listed each scheduled payment on the mortgage loan and showed the amount of each payment that would be applied to interest and the amount that would go toward reducing the outstanding balance.
I studied the document for a minute and then said, “So, if I follow this schedule and mark off each payment as I make it I will be able to watch the loan balance go down, right?”
“That’s correct,” the attorney replied. “Think of it this way, when you pay rent, all of the money goes to someone else. When you make a payment on your mortgage, part of it goes to the bank as interest, but the rest reduces your loan balance. Paying down the loan is like taking money out of one pocket and putting it in the other; you don’t have the cash but your equity in the property increases, but he said, “even the part that goes to the bank helps you because you can deduct it on your tax return and you won’t have to pay tax on that money.”
That brief discussion started me down a road that eventually led to carefully tracking my financial progress. From the first payment, I circled the principal and interest amounts as well as the new balance after each payment was made. Beside each monthly entry, I wrote the date and check number I used to make the payments. I soon noticed that as the loan balance got smaller, less of each payment went to pay interest and more to paying off the loan.
This was my first introduction to tracking financial progress. While it was exciting to watch the loan balance go down each month, it was even more inspiring when I saw the nice refund I got when I filed my taxes the first year.
Here’s a tip! I started thinking about the payments I was making on a car loan and two credit cards and decided it might be fun to track those payments as well. I didn’t have amortization schedule on those debts, so I started a ledger sheet on each outstanding debt. Just like on the amortization schedule, I had a column for interest, principal and balance. As I made each payment, I put the interest in one column and the rest in the principal column. I reduced the outstanding balance by the amount in the principal column. The first month, I learned that I needed to add a column for new charges and would have to add the amount in it to the outstanding balance. If I charged more than I paid in principal, the balance went up instead of down. This revelation caused me to think before I charged things on the credit cards and this resulted in me soon paying off the credit cards.
That was over 25 years ago and I haven’t carried an outstanding credit card balance since. The process of tracking the repayment of my debts showed me the value of tracking my financial progress and led to me achieving financial independence.
If you owe money, keep a record of how you are paying off the debt. When you start saving, keep a record of that too. On regular intervals measure your progress by subtracting what you owe from the value of what you own. (I do it annually.) The difference is your net worth. If it is growing, you’re making progress and are on the right track. If it’s declining or is a negative, you need to give yourself a checkup from the neck up and reevaluate your lifestyle and spending habits. Regularly tracking your financial progress keeps you out of trouble and gives you a leg up on those who don’t.
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