How to set a net worth goal for the year

A net worth goal for the year is set in the currency the household controls, which is contributions, not totals. Add the savings transfers you will make to the debt principal you will pay, and that sum is the goal; the change in total net worth at year end is the result, which includes the market's part and is read rather than aimed at. A household that sets a $700 monthly transfer and pays $3,600 of principal has a $12,000 goal, checks it quarterly at $3,000 a quarter, and knows on the last day of the year whether it did what it planned regardless of what the market did to the total. A goal set as a total is a goal the household can miss by saving perfectly and hit by saving nothing.

Why a total is the wrong kind of goal

A total net worth target for the year, "$60,000 by December," is the sum of two things: what the household will contribute and what the market will do to the balances it already has. The first is a plan; the second is a guess. A good market year hits the target with no saving at all, and a bad one misses it after a year of perfect discipline, and neither outcome says anything about whether the household did its part.

The contributions goal separates the two. It is hit or missed by the household alone, it can be checked every quarter against a known figure, and it produces the total as a result, which is the right order.

Set the goal in four steps

1. Decide the monthly savings transfer for the year, from the budget, as a fixed amount on payday: to the emergency fund, the investment account, or the retirement account beyond payroll.
2. Add the payroll retirement contribution if you count it, from the pay stub, times the number of paychecks.
3. Add the debt principal the year's payments will pay, from the loan statements' amortization or from last year's principal, plus any extra payments planned.
4. Add them up. That is the year's contributions goal. Divide by four for the quarterly checkpoints.

Then note, separately, what total net worth would be at year end if the market did nothing: this year's total plus the goal. That figure is not the goal; it is the baseline the market's part is measured against.

A worked year

The savings transfer is $700 a month, and the loan payments will pay $3,600 of principal over the year with no extra payments planned. The goal is $8,400 plus $3,600, or $12,000, at $3,000 a quarter.

The goal was met, $12,050 against $12,000. The second quarter came in short, because a car repair took one month's transfer, and the third quarter's catch-up made it up, which the quarterly check is for. The total rose $13,800, of which $1,750 was the market, and a household reading only the total would have called the second quarter a bad one for saving when it was a bad one for the market and an ordinary one for the repair.

Check it quarterly, not monthly

Monthly checks measure the timing of transfers and the noise of the market; quarterly checks measure the plan. On the first day of each quarter, add up the previous quarter's transfers and principal, compare with $3,000, and decide one thing: catch up, hold, or revise. A shortfall of one month's transfer is caught up over the next quarter; a shortfall of two quarters means the transfer was set above what the budget could carry, and the goal is revised rather than chased. See How to read your net worth trend over a year for the year-end reading that puts the four quarters together.

Set next year's goal from this year's result

Next year's contributions goal starts from this year's actual, $12,050, and rises by what the budget has freed: a paid-off loan's payment, a raise whose split was decided in advance, a subscription audit's savings. A goal that rises a little every year from the previous year's actual is the mechanism behind a net worth line that curves upward; see Why net worth grows slowly at first and then faster for why the same contributions produce more each year.

Common mistakes

• Setting the goal as a total. It can be hit by luck and missed by discipline.
• Counting the market's part as progress toward the goal. It is a separate line, and it reverses.
• Setting the transfer higher than the budget can carry. The second missed quarter ends the goal; a smaller transfer that is met all year is the better goal.
• Checking monthly. The timing of one transfer or one market week reads as a miss.
• Forgetting the debt principal. It is half the contributions for many households, and it happens whether or not it is counted.
• Not revising after a real change. A job loss or a baby changes the goal, and a goal that is not revised is abandoned.

Common questions

How do I set a net worth goal? As a contributions target for the year: the savings transfers plus the debt principal you will pay, checked quarterly. The change in total net worth is the result, read at year end, and it includes the market's part, which is not part of the goal.

Should my goal be a specific net worth number? No. A total depends on markets and home values the household does not control, so it can be hit without saving and missed with it. Set the goal in contributions, and note what the total would be if the market did nothing as the baseline for reading the result.

How much should I aim to add to my net worth each year? What the budget can carry as a fixed transfer plus the principal the loan payments will pay, starting from last year's actual and rising by what the budget has freed. The figure divided by take-home income is the savings rate, and rising year over year is the target.

What if the market drops and my net worth falls despite meeting the goal? Then the goal was met and the market's line was negative, which are two separate facts. The contributions are in the accounts; the market's part is the balance's price on one day. The year is read as a good year for saving in a bad market, which is what it was.

Should debt payoff count toward the goal? The principal portion, yes, because it raises net worth exactly as a deposit does. Interest does not. Extra payments planned for the year are part of the goal; the principal inside the regular payments is part of it too.

How Zypper handles this

Zypper shows the goal's two lines on one page. The savings transfers are recognized as movements between your own accounts and never read as spending, and the loan balances fall by the principal paid as payments post, so the quarter's contributions are read from the accounts rather than added by hand; net worth is computed from every account and charted over time, so the total's change and the baseline the market is measured against are both on the chart. In the budget, the monthly transfer is a category with a fixed amount, and Left to budget, your expected income minus everything budgeted for spending, confirms the plan carries it before the year starts. See Net worth tracking, Splitting and linking transactions, and Creating your budget for the details, or get started with Zypper to set next year's number from this year's.