Just like a corporation’s balance sheet, a net worth statement tracks your assets and liabilities, how much you own and how much you owe. Unlike a budget, a net worth statement is as of a specific day, it can be easily tracked with a spreadsheet or more advanced tools.
While we tend to think of a budget and net worth statement as tracking different aspects of our finances, they actually work together in some interesting ways. Understanding how both concepts work and interact can teach us a lot about how small financial decisions can have a big impact on our finances.
However, as much as there are a lot of clear differences between budgeting and net worth, they are also intertwined and there are a whole lot of important ways in which budgeting influences your net worth.
To start with, your budget has a lot to do with powering your journey towards wealth. This helps us to minimize debts and save in advance for emergencies, retirement and other savings. As time goes on, it stops being the case that our budget builds wealth but a qualitative net worth that has been built overtime with the help of budgeting now takes the place to further wealth creation.
In the same vein, budgeting gives you control over your money. It serves as a way of being intentional about the way you spend and save your money. It saves you the stress of suddenly having to adjust to lack of funds because you did not initially plan how to spend them.
Also, budgeting provides you with an early warning for potential problems. This means that budgeting allows you to plan ahead to make life adjustments when any financial problem surfaces and to cater for both expected and unexpected costs.
All the above-mentioned points about budgeting ensure that you have a solid net worth. Having a solid financial plan will allow you to save money, afford the things you really want, and achieve long-term goals like saving for future expenses.
The decision to embark on a journey towards financial independence is a big deal! It marks a fresh beginning with your money and means that you are setting out to accomplish something that can change your life for the better. Budgeting is an important aspect of wealth creation and solidifying your net worth.