With any big goals you need to track your progress. I think that financial independence is no different and the most popular method for financial bloggers seems to be to track their net worth. I have also been tracking this for a few months. However, I now wonder if it is the most useful tool if you are aiming for FI.
If you read Rich Dad Poor Dad then you see Robert Kiyosaki defines assets as something which generate an income. With this in mind, the problem with the net worth model becomes instantly apparent. The the net worth method normally to includes things such as house and cars etc. These items do not generate an income and also they cost money to own. There is maintenance, servicing, insurance etc on these items which in general increase proportionally with with the value of the property or car etc.
You could have a huge net worth if you live in a mansion and have lots of luxury cars but the cost of keeping all these possessions would just trap you even further to the treadmill of work. Therefore, maybe a model which only includes what Kiyosaki calls assets would help you to track how close to FI you are. You could track the total value of your investments and the monthly/annual yield they generate.
The yield might be the best indicator to track. Essentially, to be financially independent you need the income from your assets to cover all your expenses. Therefore, once you know how much you need/want to live on (more on this in a future post) then you can see how close your income from assets is to that figure. Once it reaches this figure then hey-presto you have achieved your goal.
I know most other bloggers concentrate on the net worth and tracking that is better than tracking nothing. However, it is important to remember not to let it trap you into a middle class lifestyle where you are always buying bigger liabilities. Being a millionaire does not mean that you are financially independent. In fact it could be exactly the opposite…..