Category: Save

What Should I Include in My Net Worth?

Your Net Worth is all of your Assets minus your Liabilities. In other words, all your money + equity – your debts. The Net Worth value is important to track, even if just once a quarter, to make sure you are building wealth. A doctor making $300k/yr could have a low Net Worth if they spend 99% of their income; whereas a teacher could have a higher Net Worth than that doctor if they save $10k over the year. Your Net Worth quantifies how well you are converting your income into wealth, as opposed to luxuries that have no value after they are used. For many, equity from the home they live in is a large chunk of their Net Worth. This isn’t bad, per se, but it means only a smaller portion of your Net Worth is being productive (i.e. earning interest).

Here is what to include in your Net Worth with examples:

Cash – The balances in your Savings + Checking accounts that aren’t already spent, Cash in a safe or safety deposit box (or under your mattress), savings in your HSA or FSA, money owed you that you realistically expect to receive soon, etc

Subtract Debt – Credit Card balances, auto loans, and other lines of credit

Investments – Retirement accounts (401k, 403b, 457b, 529, IRA, etc), investments in your HSA, brokerage accounts, Robin Hood, WeBull, peer-to-peer lending

Real Estate, minus any mortgages or loans – Take a fair appraisal and subtract your mortgage balance. Zillow may or may not give you a realistic value. You could compare estimates from Zillow, Redfin, and ReMax to get in the ballpark. Personally, since we have only owned our home for a few years and want to be conservative, we’re using the last official appraisal. Not required, but do be conservative and honest here. We also don’t update this value but maybe once a year or two as we want to see the organic growth of our Net Worth from frequent saving and investing, not frequent “artificial” increases from our home value jumping around.

Precious Metals – This shouldn’t be a huge chunk of your portfolio, but some is usually good. Gold and Silver aren’t the best investment nor even the best hedge against inflation, but it’s part of not keeping all your eggs in one basket. There are times when gold is worth it’s weight in, well… gold. For example, some Jews fleeing Nazi Germany sewed gold coins into their clothes knowing they could restart their lives elsewhere (rather than having German Marks in say Japan or Argentina).

? Vehicles – IF using conservative values and mostly offseting loans, in our opinion. To be honest, the only reason we included our vehicles’ value in our Net Worth is because Personal Capital automatically added the loans (update: when we had the loans, but they are paid off now). Because vehicles decrease in value each year and we only buy reasonable ones (currently <$10k) we actually need, we wouldn’t sell them unless we were destitute because they get us to and from work and family. When a car loan was in Personal Capital, we added a manual asset offsetting the loan. This manual asset was always less than the actual value of the vehicle. In our opinion, the Net Worth should be about growing your passive investments and overall wealth; not having expensive luxuries that decrease in value but look valuable on paper. Would you rather have $200k “equity” in a super car or $200k in a 401k? Unless your net worth is >$2-5 million depending on your other lifestyle choices, the 401k is the correct answer.

Dollar Cost Averaging is Timing the Market!

There is a common misconception about Dollar Cost Averaging (DCA). Let’s say you’re paid twice a month, and on each payday you regularly contribute to your retirement accounts. “I’m dollar cost averaging!” you might say. No, you’re not. You are doing something even better! Investing as soon as you have the money and maximizing time in the market with compounding over decades because no one can guess the future. See The Market goes UP and DOWN.

Dollar Cost Averaging implies you are choosing when to invest the money you already have.

Let’s say you saved $2,000 over 3 months in a savings account…

  • Option A: The stock market dips for three days straight and you buy! You are timing the market. Only hindsight is 20/20; you’re betting it was actually a good time to buy.
  • Option B: You keep the cash in savings because “the market is over-priced”. Again, you’re timing the market.
  • Option C: You’ve been studying the market for those 3 months and you are sure which stock is under-valued. Confident in your answer [but having absolutely no idea what will actually happen], you click “Trade”. You are timing the market.
  • Option D: You Dollar Cost Average by buying $500 worth of stock a week for the next 4 weeks. Or should it be $250/wk over 8 weeks? Or… It’s the reasonable option, right? Right? Again, you are timing the market. You are smoothing out the volatility, sure, but will have lower or higher returns based purely on happen-chance.

Exploring “Option D: Dollar Cost Averaging” further… Let’s say stock prices plummet starting on week 3 of your averaged stock purchases. You’ll be ecstatic you waited to buy at least some of your shares. What if instead of a recession, stock prices soar week after week after week? You’ll be kicking yourself for not buying all your stocks when prices were low. What if stock prices stay flat? No harm, no foul.

No matter which stock market scenario, you were guessing. Dollar Cost Averaging could have made you money, lost you money, or not mattered at all. All you did was average your volatility; any return potential was pure guessing!

Have some made money actively trading? Yes.

Has anyone consistently beat the overall market, such as the S&P 500 index, for 2+ decades straight? Only a handful like Warren Buffet. And no disrespect to the legend, but besides his hard work and acumen, there are always outliers in statistics for even improbable or uncontrollable factors. Could someone flip heads 50 times in a row. Absolutely! Very unlikely, but entirely probable. There is a reason Warren Buffet advises index fund investing. The returns you would have seen from passive index fund investing over Buffet’s career would have made you a millionaire many times over anyways.

Instead of Dollar Cost Averaging, focus on…

  • Spending much less than you earn
  • Hustling to increase your income
  • Increasing your savings rate
  • Passively investing in US index funds

This combination has historically proven to be an exponential creator of wealth, no matter your starting point or career path. And there are no clear shifts in the market proving it still isn’t. After all, we’ve seen incredible market crashes over the past 75+ years and each time the economy in general, and businesses in particular, come back.

Of course, if you are a business owner, there is the potential that re-investing in your business provides the greatest returns. But it is also placing all your eggs in one basket. Eventually you should diversify in the stock market, real estate not associated with your primary income, etc.

FIRE Options: Financial Independence Retire Early

FIRE, or Financial Independence Retire Early, is for those who don’t believe they will be employable for a full 45+ years or they won’t want to be. And to be honest, the most important part is the “FI”. Financial Independence is empowering, no matter what age, lifestyle, or income. JL Collins describes it as “F*!# You” money on his blog. And you don’t even have to be full FI to see the benefits. Your ability to say yes or no won’t come from a position of fear of losing your job or missing the next promotion, but one of “I don’t need you like all your other employees do”. And in a twist of fate, that will likely give you more options than them.

I won’t belabor the “How” as many have already covered this topic. Search “Trinity Study” and “3.5 to 4% Safe Withdrawal Rate” for more. Let’s focus on the “What” and “Why”.

None of these terms or definitions are my own, merely boiling down some of the FIRE acronyms for simple understanding…

FIRE

FI or Financial Independence: Have enough money invested where your passive income (no work other than occasionally re-balancing or meeting with advisors/agents) can completely cover your current and future lifestyle. Often earned through giving your all at a 40-60-80+ hr/week job for 10-15 years until you completely reach your financial goals, then working, or not, on your own terms. For many, this is $40-60k/yr of indefinite income from $1-1.5 million in investments.

Note: Owning rental property can lead to FI, but for many landlords, it’s a very active endeavor managing tenants and repairing/maintaining the property. So although you have the money/income, you technically aren’t FI because if you stop working, so will your income. Transferring the operation of your business, rental homes or otherwise, to managers and becoming an absentee owner may be all that is required, given you have enough business income to offset their fees and still afford your lifestyle.

RE or Retire Early: I mentioned earlier that Financial Independence is the most important goal. If you want, you can keep working, or find another gig with less hours or more meaningful work, or you can quit working altogether. The choice is yours. But don’t excuse not saving and investing because you cannot see yourself quit working before 65 years old.

PROS:

  • Enjoy full retirement and FI earlier than any almost anyone else and for 50+ years
  • Once you’re done working, you are done! No more levels of bosses, pointless meetings, endless policies and procedures, poor health and wellness, etc

CONS:

  • 10-15 years of work that will almost certainly burn you out
  • You may have to move from the HCoL area when you have earned FIRE, away from your existing social circles and old haunts
  • You missed out on enjoying your 20’s and some of your 30’s

Lean FIRE

You will be eating lean and living simple with Lean Fire. For many, this is about ~$750k of investable assets generating $30k or so per year. The dollar amount varies, but most in this camp expect to need between $2k to $3k/mo to maintain a low cost of living indefinitely.

PROS:

  • Reach FIRE earlier, because you have to save less
  • Enjoy your 30’s, and maybe even some of your 20’s
  • You’re going to move to a low cost of living area, maybe even internationally, so why would you slave away for more years than absolutely required?

CONS:

  • Stuck with a lower middle class income for the rest of your life, regardless of future goals or surprise medical expenses
  • No fudge factor
  • Have to re-enter the workforce when you are much older and your skills are rusty if you eventually want a better lifestyle (see Barista FIRE)

Fat FIRE

You’ll have enough to live fairly well in a high cost of living area (HCoL) like New York City or SoCal, or live like royalty in a low cost of living area (LCoL). Many need $100k/yr and $2.5 million invested at a minimum to live like this indefinitely.

PROS:

  • You will live like a king or queen enjoying a luxury vacation all day everyday, as long as it isn’t ridiculous
  • Your social circle, family, and favorite places are all in expensive areas
  • Leave a large inheritance to your adult children and even grandchildren

CONS:

  • Your working career will likely span 15-20+ years in a high-stress, but high-paying job
  • What if you only want to live with excess for a few years, then you delight in simpler things? You would have worked for 5-10 years longer than you needed to, maybe even missing out on your 40’s.

Barista FIRE

Similar to Lean FIRE, where you NEED to draw from your investments when you leave full-time work, but also MUST immediately pick up a part-time, lower-paying job or gig for additional income to offset a better lifestyle and perhaps provide some benefits/discounts. You could have reached Lean FIRE with your investments and the additional income takes you to full FIRE, or require the additional job to reach even Lean FIRE.

PROS:

  • Reach almost-FIRE fairly quickly, as you might only need $500k saved and invested
  • Barista-type jobs can be in pleasant places all over the world, where you might want to retire and plug into a local community anyways

CONS:

  • The grass isn’t always greener: You’re probably glorifying a low-paying job from the cubicle or corner office of your high-paying job. Similar-enough boss, a schedule to follow, lower pay and you are burning your hands in hot water while washing dishes and dealing with impossible customers.
  • What if you don’t want to work anymore, or can’t, or have surprise medical bills with no insurance?

Coast FIRE

With Barista FIRE, you’re “retired” but you MUST work?! With Coast Fire, cut back how much you save while keeping the same or similar job, or something completely different that still pays the bills. But you don’t have to save anymore nor will you withdraw from your investments until much later in life. You’re working to pay for your current lifestyle, letting your nest egg compound in the background. At Coast FIRE, you’ve saved enough in your nest egg, if left to compound until you reach your desired retirement age, you will have enough money to fully retire without contributing a single cent more (if your calculations are correct). And you’ll have a better lifestyle for the second half of your working career since you are saving less, or nothing, for retirement once you reach your Coast FIRE number.

PROS:

  • Better lifestyle in your 30’s, if you saved up enough in your 20’s to start coasting
  • Many people prefer to stay employed, but in a less stressful and/or only 40 hours per week job (or less). Provides health insurance, travel perks, sense of purpose, decent lifestyle, etc.

CONS:

  • Be cautious of completely stopping all saving for retirement before reaching FIRE. Continue to contribute up to your employer match or maxing an IRA each year, at a minimum. When your coasting period is 15-20 years or less, there is a statistical 10-30% chance the 7-8% returns after inflation may not happen. The safer bet: decrease your savings rate from 50%+ down to 15%, so you can still inflate your lifestyle considerably while also building a safety net.

The advantage of Coast FI is access to more money, time, and a better Quality of Life at an earlier age. The tradeoff of Coast FI is a smaller retirement nest egg or retirement at a later age.

Flamingo FIRE

We recently discovered this term by an Aussie blog based on the same name, and we really like it. In fact, it is a really good way to view our own plan! In a nutshell, use your after-inflation return and calculate how many years for your portfolio to double. If it’s the historical stock market return of 7%, then your portfolio will likely double in 10 years. When your investment portfolio is 50% of your FIRE number, Coast FIRE for that many more years while your portfolio doubles in the background. And then do whatever you want! Like Coast FIRE, Flamingo FIRE lets you sample semi-retirement, easier work, or however you want to cover your current living expenses. Since many don’t/can’t quit all work cold turkey, and will likely get bored and pick up a income-producing hobby at some point, it’s a good way to step down your work.

PROS:

  • See Coast FIRE pros, but likely fewer years of working/Coasting

CONS:

  • Not many, but see the Coast FIRE cons

MISC

  • BalloonFI – Inflate your lifestyle (balloon) to match your safe withdrawal rate
  • LifestyleFI – Adjust your lifestyle to your net worth

Our Plan

Short Story: A mix between FIRE, Coast FIRE, Flamingo FIRE, and Fat FIRE.

Long Story: Between the Great Recession and taking a long time to discover a career then building skills and experience to earn >$40k/yr, earning a college degree while working 2 jobs and 70+ hours per week, plus several children who will graduate high school before we could reach full FI… We have decided to pursue FIRE as best as we can, then probably a Coasting Fat FIRE depending on how things go. For us, the current goal is saving $50k/yr and investing it mostly in a Total Stock Market index fund.

Because no one knows the future or what the job market will be in 15, 10, or even 5 years, we want to reach Lean FIRE and then full FIRE as soon as possible (~40-43 yrs old). But we also want to travel and spend time with our kids before they leave the house; so we are doing those things on a budget focusing on experiences rather than luxury vacations. Think road trips and staying with family near natural beauty.

Once we reach FIRE, likely after our oldest two kids leave the house, we will work fewer hours (just 40 hrs a week sound nice) and either continue to save 50% of our income to reach true Fat FIRE by age 50 or drop our savings rate to 10-20% and increase our travel budget. …and retire when we want to. Either way, our goal is to enjoy FI with our older teen/young adult children, and hopefully eventual grandchildren.

Financial Status Update – Dec 2018

What. A. Year.

A lot happened in 2018 for us…

  • Finished my Bachelors Degree
  • Received solid promotions with raises at both my full-time and part-time jobs
  • Had a baby
  • Paid off 2 loans

And 2019 is looking bright as long as we keep up the hard work and save, save, save!

PersonalCapital_2018_All

$149,238 – I upped the value of our home by $10k twice during the year to match a truer value.  Subtracting that, we saw an increase of almost $18k over the year.  Not as much as we wanted, but a solid gain on all fronts.

 

Our investments grew by more than 25% this year, between additional contributions and returns.  And to be honest, the market downturn at Christmas followed an overall poor year.  Meaning that we actually added more than Personal Capital gives us credit for; we just lost it in negative returns.  But we have a long-term view and use low cost index investing.

PersonalCapital_2018_Investments

 

The Home

We completed a lot of little things this year, postponing some needed items to 2019 or even 2020.  Much of the almost-a-need items, such as replacing very old, drafty windows or fix the leaking [detached] garage roofing, could be done now with a loan.  But we want to be debt-free besides the mortgage and have a solid cushion for when the next recession comes around.  Fixing the remaining big ticket items could cost $15-20k all said and done, and we don’t want those bills hanging over us just yet.  But the home has the value potential, so they will be completed for us to enjoy them well before we move out.

We did increase the value of our home from $200k to $210k within Personal Capital as it is easily worth that now.  That is $10k less than our new taxable value (we fought the city and won, reducing the taxable value by $20k!!!).  Zillow now zestimates the home at being worth near $270k which is crazy and probably not realistic.  But talking with a Realtor doing comps, we could sell the extra lot for around $46k and our home is still worth the taxable value if not more.  So, while we plan to keep the land intact for now as we really enjoy it, we have some hidden value when we need a bigger home or different location.

 

Loans

We paid off our 401k loan (used to complete needed renovations prior to moving in) and the second car loan (very early in 2018, if memory is right).  We just have our mortgage, a Home Depot no-interest loan for pre-move-in work, and a minivan loan.  All interest rates are very low (2.8% & <5%), so we are paying off the no interest loan due this year asap.  With our estimated tax return coming in Feb/Mar of 2019, we should have it paid off quickly.

 

Savings

We are saving a good chunk each pay period between what is automatically deposited into the retirement accounts and a HSA.  We have a goal to increase some additional savings into an IRA, but we are missing our goal.  We need to revisit that goal and redouble our effort.

 

Financial Status Update – Jun 2018

Quite a lot has changed in the last year and a half, both personally and financially.  Besides moving up at work and a growing family, we have also continued to save a large chunk of money each month.  In addition, we bought a fixer upper and continue to sort-of invest/dump money into it.  So where are we at?

PersCap_NW_2018_Jun

Our Net Worth has skyrocketed!  Well, sort of.  Part of this change from $50k to bouncing around $130k is that I have added in more accounts to Personal Capital; but we have also saved much more in the roughly eighteen months since the last financial update.  Let’s cover this one by one…

The House

We bought a house for $168k with 5% down so that we could do all the needed renovations (such as gallons of KILZ oil-based primer to cover all the smoke stains).  We essentially have a new house as the floors, kitchen, and bathrooms (save the tubs) are all practically new.  But we knew this all going in.  The home is in a high-value area; close to many well-paying jobs but far enough out that you aren’t in endless congestion.  The SEV x2 on our house is $240k (and in a few years after all the work is done and the market likely goes up farther it will probably be worth that), but a rather conservative estimate would be $200-205k.  The large bump in April 2018 in the Personal Capital chart above is due to me raising the value of the home to $200k from $190k, which was the appraisal before all the work was done when we bought it in July 2017.

Included in the kitchen renovations are nicer cabinets with soft-closing drawers and hinges, quartz countertop, and a custom layout.  The floor has a nicer pergo flooring through-out and we are working on finishing a part of the basement in addition to finishing the first floor.  And, we are fixing up the decent two-car garage and 15x30ft workshop; both of which have power and the workshop has natural gas with heaters hung from the ceiling.  And did I mention we have over an acre with only a two minute walk from a high-end downtown.  It’s a very nice place to live, and while taxes are quite high, it is the perfect place for us now.  And we only have $197k into the house so far.  Our best estimate is $210-215k depending on how much we fix up before selling in 5-10 years.

As an FYI, I use a manual value for my home value as opposed to Personal Capital’s Zillow “zestimate” because it is [in my opinion] wildly high and rather volatile making the growth charts hard to follow.  We currently have $44k in home equity given a conservative estimate of the home’s value.

 

Retirement Accounts

Besides two work retirement accounts, the wife and I each have an IRA with Vanguard (a company we highly recommend, by the way).  All said and done, we have roughly $50k in investment accounts, although either the market took a beating (I mainly use index funds) or Personal Capital glitched in syncing an account.  This is in addition to cash (~21.6k per PC) and other liquid assets held in non-linked accounts.

PersCap_Investments_2018_Jun

 

Speaking of retirement…  There are two scenarios I am tempted by.  First is a semi-retirement starting at 50 years old and then working part-time for another 10 years as a well-paid, but no-benefits-package consultant.  This simulation is at a 63% chance, and a decent/median chance of working out just fine:

PersCap_Retire50_30kYear_2018_Jun

 

The other option is to retire at 60 years old after having worked full-time for 40+ years.  Both options delay taking Social Security until age 70 (the current age to receive the highest monthly payments) and a conservative estimate of only $25k/yr combined for the two of us.  This second option results in a 77% success rate and a median ending portfolio value of a million dollars more than the first:

PersCap_Retire60_30kYear_2018_Jun

 

The nice thing about these two plans, and the real one I finally decide on, is that I don’t have to decide now.  I just keep putting in the work now; earn more money and save more money and invest more money.  And, options will open up.

 

Miscellaneous

A short section, but I did want to clarify that the Net Worth above doesn’t include sundry consumable items up to and including vehicles.  In fact, we have one auto loan and I haven’t even offset it with the value of the vehicle that is worth maybe a thousand dollars more than the loan (need to set a reminder to add that in to make it a fairer value).  We are also working on paying off a <$5k loan from a 401k to help with the home remodel, along with a no interest credit card from Home Depot.  And that about sums up where we are at.  Oh, thanks to paying cash and some help from work tuition reimbursement, I do not have any college debt having just completed by Bachelors in Business.

 

I wrote in 2016 that I was very frustrated with where we were at financially.  We have definitely made up lost ground, but we are not there yet.  But all of this only happened because we have been saving, saving, saving and increasing our income by working hard and smart…