I love basketball, and when I was younger played frequently. Sometimes in a pick-up game we would be playing hard, but no one was keeping score. After a while someone would say, “First team to 20 wins.” The intensity would immediately pick up, especially on the defensive end, and suddenly everyone became more focused.
Other times we would be playing when someone would yell out a score. A player on the other team would respond, “We didn’t know we were keeping score.” The team keeping score was invariably winning. They were more focused and cared more about what was happening. On the other hand, the team not keeping score was just going through the motions. They were not even sure what strategy to employ because they didn’t know what was needed. The team keeping score had a huge advantage.
These examples illustrate an important principle stated beautifully by Thomas S. Monson, President of the Church of Jesus Christ of Latter Day Saints:
When performance is measured, performance improves. Where performance is measured and reported, the rate of improvement accelerates.
What does this have to do with personal finance? Many of us go through life not keeping score financially. Since we don’t know the score we just go through the motions. We are not focused and are not sure what strategy to employ. Meanwhile, the competition (banks, mortgage holders, and credit card companies) are keeping very careful score. If we want to survive, compete, and eventually thrive it is vital to keep score.
The type of scoreboard necessary to live The Micawber Principle is a monthly budget. The next several posts will be about budgets and some of the specific tools and strategies you can use to gain control of your money. This is real life, not practice, and to succeed financially you have to start keeping score.
I would say a budget is a great tool to begin keeping score because without it a person will lack the discipline to take control of their finances. Once you have a budget in place and is following it I believe you should create an asset and liability statement where assets are things that create income or cash flow for you and liabilities take money from you. I believe what Robert Kiosaki says when he says a house may not be your asset. To win the game you need to increase assets faster than liabilities or better yet increase assets and reduce liabilities.
I absolutely agree, and I will talk about this in a future post. I budget is just a start, but until you do that it is tough to make progress.