I mentioned in another post that I wasn’t going to talk about the details around my net worth. Well, I’m not. What I have been doing is reviewing my net worth on an ongoing basis to make sure that my wife and I are headed in the right direction. Here are a few observations about our net worth:
Our net worth is increasing at a rate of about 50% of our yearly salary each year. That doesn’t necessarily mean that we are saving 50% of our salary, it just means that, along with what we are saving from my job, we also are seeing increases in our net worth in investments, real estate (our house) and reduction of our home loan (which is the only debt we have). We are also able to see this level of increase by minimizing our depreciating assets, which leads me to the next observation.
We are minimizing the number of depreciating assets we own. This is the single hardest item that I have personally dealt with. I love cars. Not just a little, but A LOT. Unfortunately, cars are a pretty big drain on a monthly budget and lose their value over time. It’s not practical to walk everywhere, so we have to have them. What we have done, is pay cash for our cars and not let the total value of our cars exceed 10% of our net worth. Some people could do far better than this, but because of my love for cars, this is how we’ve chosen to do it. That being said, we won’t be buying any new cars if we can help it so that we can manage the depreciation in as most efficient way possible.
We pay additional on our house principal every month. Not a ton, but we roughly double the amount towards the principle every month. We expect we’ll shave somewhere around 8 years off the loan period and shave 10’s of thousands of dollars in interest. We also plan not to ever borrow against our house. We would really like to get it paid off. Some financial advisors will tell you that it isn’t always smart to pay off the house but if you pay cash for everything else and this is your only debt, you might as well chip away at it. The only exception that we will make to this rule is if we want to purchase another appreciating asset such as a rental house or vacation home.
As part of our management of our net worth, we have created a â€œlook aheadâ€. The purpose of this is to estimate what milestones we should strive for each year. We took a very simple approach to this and simply increased our networth by the same amount year over year. We fully expect to beat this look ahead by doing better in our investments and using a conservative number for our home equity increase.
We also track our expenses as a percentage of our â€œafter taxâ€ income. This way we can see where all of our money is going each month and it’s a quick and easy way to see what percentage of our income we are saving â€œafter taxâ€ on top of all that we are saving â€œpretaxâ€. Programs like Quicken or MS Money will do this for you as well, but I’ve never had the patience to continually keep everything updated in those programs. That’s why I have created my own Excel spreadsheets along with graphs so that I can easily see where we are at any given time.
Another thing that we do is label all of our expenses as either â€œfirmâ€œ, â€œcan eliminateâ€œ, or â€œcan lowerâ€œ. This way, we always know which expenses we can get rid of easily if our income levels change, or we want to meet any stretch financial goals etc.
Well, that’s it for now.