June Net Worth Update

Okay, so I'm on the 1st of the month now. I'll try to keep it here from now on, but it will certainly test my patience.

It was a good month (well, 3 weeks) overall. Net Worth is up 2.66% over last month, bringing me up to a 20.4% gain over February. I'm about 58% of the way toward my goal for the year. See the chart below.


Of the growth, about 32% comes from debt reduction, 20% from investment gains, and 48% from new savings/investments. I expect debt reduction to continue to be a big factor until my car loan goes away (either from downsizing my vehicle or paying it off). That will be December, at the latest. At that point debt reduction should be a smaller share of my growth each month and new savings and investments should take off.

As promised, I also calculated Net Investable Assets (5.01% gain) and Net Liquid Assets (14.19% gain). Both represent an increased share of my Net Worth, which I consider a very good thing. My equity in my home is going to keep rising but I want the more liquid assets to fuel most of the growth.

Things are going pretty well, at least partly do to the continuing rise of the stock market. But I'm young, so if we eventually have that pullback that everyone is calling for, it will be an opportunity to buy up cheaper shares. I've got plenty of time for it to catch back up.

Net Worth, Net Investable Assets, and Net Liquid Assets

I'm a big fan of the Net Worth metric. I think it paints a nice picture of what position you are in financially, and gives you an easy way to set goals. But it has flaws, says Nickel. He suggests a similar measure with a different name and one major difference: Net Investable Assets. In a comment, FMF of FreeMoneyFinance goes a step further with Net Liquid Assets. I'd like to take a look at all three metrics because they each have something to offer.

Net Worth. The classic measure of wealth. All of your assets (cash, investments, property, etc.) minus all of your liabilities (loans, revolving debt, etc.). This is a great measurement because it paints the whole picture-- how much MONEY do I have? If I sold it all and moved to South Dakota, how much would I be taking with me?

Net Investable Assets (NIA). Nickel dislikes that the net worth calculation involves the primary residence and personal possessions:

The main reason for my aversion to net worth calculations is that I’m most interested in charting a course to financial independence and, in my view, financial independence doesn’t involve selling our house or getting rid of our cars. True financial independence involves amassing enough wealth that you’re able to live of your investment income with no additional input.

In his view, NIA provides a good measure of this. You simply tally up your assets and liabilities, as before, but eliminate your residence and personal property (side note-- I'm not sure what Nickel would say about an auto loan. Even if I don't count the value of the auto, I think I still ought to count the loan as a liability).

Net Liquid Assets (NLA). FMF says:

I track and record my net worth every month. In addition, I also track and record my liquid assets (the ones I can get my hands on easily and without penalty) which excludes my home and retirement investments.

I think it's wise to continue to leave personal property out of this equation as well. This becomes a measure of how much money I have that I can readily get my hands on without having to start selling my stuff or tap into retirement funds. Another good measure.

Let me just say that I like all three of these very much. They're all similar measures but the purpose of each is considerably different. I have added NIA and NLA to my tracking spreadsheet and think they'll be very informative.

This all leads to a question for me. What percentage of your net worth should be in NIA? In NLA? It's a tough question, and depends largely on your goals. If you have no plans to retire early, NLA can merely be whatever amount makes you comfortable in case of an emergency, since you don't need the liquidity otherwise. But if you plan to retire early (as I do), you'll need assets you can get to without penalty. As for NIA . . . well, that's tough. For a renter this is not a MAJOR issue, as your net worth and your NIA aren't terribly different. For a homeowner, perhaps the percentage is not so important as long as you have goals set with NIA, not just net worth, in mind.

As for me, here's how the numbers break down: 48.7% of my net worth can be classified as NIA, and 5.7% of my net worth can be classified as NLA. So personal property and my residence comprise just over half of my net worth. I knew this already, and getting that under 50% has been a minor goal for me.

The shocker is the NLA. 5.7% of net worth? Just 12% of NIA? That seems really lousy and I'm not comfortable with that number, and if I'm to retire early, it will have to grow rapidly. What this amounts to is cash savings + taxable investments - non-mortgage debt.

When I read other blogs, some people have negative net worth. I always felt good because mine was significantly positive. Well . . . my NLA hasn't been positive until recently. It was probably negative last summer, as I had a car loan with a much larger balance and no brokerage account. If people took a hard look at this, some people with great net worth may not look as rosy, and some with negative net worth might look far worse off (credit card debt would be nasty for NLA).

There is a bright side though, for me and everyone else. NLA can grow rapidly. Probably much more rapidly than net worth or NIA, if you are committed to it. Why? Because all debt repayment will go straight to to this bottom line, and as a %, the growth can be tremendous-- especially early on.

Take me for example. My net worth has grown 17.3% since February. My NLA has grown 83%. Why? Well, two reasons. One, it started small. Damn near zero. Two, debt repayment on my car loan and eye surgery is contained in my NLA, and these account for nearly $800 each month. That's a far larger percentage of NLA than it is of net worth. In the coming months I expect it to continue a rapid ascent. I'll know that my NLA is in better shape when it starts to slow down a little-- this will mean that my debts are gone and my NLA isn't so tiny anymore!

I'll be thinking, in the coming weeks, months, and years, about what percentage of my Net Investable Assets needs to be liquid. There is an answer out there and I just have to do some math to get a good estimate. It's clear to me that this is the weak area of my financial situation. I have to thank Nickel and FMF for their comments on the topic. Without them, it may not have jumped out at me as it has.

Net Worth Update

So I'm impatient! I keep telling myself to wait a full month before updating my net worth, but it's fun to update, so I haven't been able to wait that long. I figure when I back up all the way to the 1st, I'll try hard to stick with the 1st from then on as a measuring point. Anyway, since April 17th (3 1/2 weeks) my net worth has climbed 3.45%. Since I began tracking in February, it has grown 17.3%, nearly halfway to my 2007 goal of 34.8%. Here is a chart of my progress so far:

The strong US market fueled 31% of this month's growth, debt reduction another 36%, and the remaining 33% came from new savings and investment contributions. Pretty good balance! If the market stays strong, it looks I will achieve my net worth goal by the end of the calendar year, which would be nice. Many people are expecting a pullback at some point . . . that could keep me from achieving my goal at all. But that is beyong my control, and if the market dips, that just means I will buy more shares and get faster growth later. It's nice to have a long investment horizon.

My current financial situation

A bit about my situation:

Debt: I have a mortgage and an auto loan, and that's all at present. The auto loan should be paid off by the end of the year. The only other "debt" I have is a medical expenditure account with my employer. I set the account up to pay for laser vision correction in January. I have been reimbursed for the surgery and the amount is being deducted from my paychecks through the end of the year. Interest-free loan! I do have credit cards and use them regularly, but I never carry a balance.

Net Worth: I may post specifics in the future, but for now I'll just tell you the progress I've made recently. I started tracking my net worth in mid-February . . . it's positive but I'm nowhere near using the "million" word, even fractionally. I set an aggressive goal for the year . . . 35% growth in net worth. With some frugal spending, aggressive investing, and a fortunate increase in the value of my home, my net worth grew more than 13% over the next two months. I will update again in mid-May, and I expect to be near 50% of my growth goal for the year. The last 50% will be tougher, as I don't expect to see the same kind of bump in home equity to help me along.

Career: I do government research, so the pay is not spectacular, but the benefits are good. I get a lot of vacation and I don't have a stressful work day too often. I try to make the most out of the money I do earn, and now that I am putting it in print I expect to hold myself to a higher standard.

Goals: Like I said, I have set the bar high for the first year. My long term goal is to "retire" at 45. Again, I think this is setting the bar pretty high, and I will have to be smart and careful to get over it, but I think it is doable. I say "retire" because if I manage to find something I love doing (read: something that doesn't have me in an office for 40 hours per week), I may not want to retire at 45. Ideally I can do both; have the money to retire at 45 but continue to do things I enjoy, especially if they pay!