Net Worth Projections

I have been doing some analysis of how to best estimate the potential growth of my net worth. This is to try an answer the question of "how much money will I have when I'm 33, 34, 35 etc. years old. It will be nice to try and celebrate the smaller successes along the way to achieving my goal. Celebrating every six figure amount is nice. I am heading close to the $200K range as I write. This exercise is also an attempt to try and determine if my current path will allow me to hit my goal of having $1M by the time I'm 40 (Feb. 2017). This exercise or analysis has been very interesting for me and reveals a lot about how the future will play out.

I have taken a look at several ways to come up with a good predictor. Right now I have decided to compare the growth of a set rate of return on a monthly basis (1.5%) versus an increase of a set amount of money (how much I save) each month as well as a specific rate of return (8% annually or .0066 a month). The past several months I have been able to save at least $3K dollars a month and hope to get about 8% return from all my investments.

An important note is that since tracking my progress I have beaten this growth rate on both accounts almost every month. I have somehow been able to save more and gain a better rate of return. However, I believe that there will be good times and bad on the road ahead so I should account for that somehow. I believe that both of these methods have a strong a potential for becoming my baseline from which to compare my progress. I have highlighted in the spreadsheet below my birthday which is in February as well as the $100K milestones.

As you can see the 1.5% column on the left does not beat out the $3K plus 8% return. However, as time goes by the advantage shifts to the 1.5% growth column. In June 2016 or in the $700K range the column on the left or 1.5% growth has the advantage and takes the lead for ever more.

As the my net worth increases the advantage becomes even greater. If I draw the numbers down until I'm age 50 the discrepancy is over 50% in favor of the 1.5% growth column.

In February of 2027 when I turn 50 the 1.5% column reads $5,365,340 while the $3k in savings plus 8% annual return column only reads $2,420,486.96. This is amazing if you ask me.

Some takeaways from this analysis so far are:

1. Saving the first 700K is influenced more by my ability to save money. From this point on it is the true growth or rate of return from my investments.

2. Based on these two predictions I will fall short of my $1M dollar goal by age 40. I turn 40 in February of 2017. At a 1.5% increase I will have $898,818.97. At $3K a month plus 8% return I will have $851, 058.98. Either of these numbers would be something to be proud of by the time I'm 40, but most definitely falling short of my goal.

3. More to follow as I ponder these numbers.

Any thoughts?

Life Get's in the Way

What a crazy few weeks I have had! My work situation is not good. The Division I work in is going through some major business issues right now. The good news is that I am still in the good graces with my supervisors (I have 3 or 4 or maybe 5 bosses). At least I feel that they would be upset if I were to leave. However, the current situation has caused me to consider other options for employment. I have only put in a minimal effort in looking for a job. I updated my resume and went to one job fair which has resulted in two potential opportunities. I also have a potential opportunity within the same company I am working. This entire situation has caused me to really question what I want to do with the next few years. I can try and stay with one company for a long time and move up in the management chain or bounce around every couple of years working on various different project that peak my interest. Having said that... All of this is stressful. In the middle of all of this I got a bad sinus infection that I am still getting over and I have also developed my first experience with TMJ (I am still not sure what this stands for) which is severe jaw pain brought on by stress.
Oh, did I mention, my wife and I just found out that she is pregnant. This does add to the stress but in some way brings everything back into perspective. Regardless, I am in a good job market in a thriving industry with some money in the bank.
The lesson learned over the past few weeks is really the importance of saving money. The corporate rat race is risky business. Not to mention it is bad for your health.

$200,000 a year and completely broke.

Someone who I have worked with for a few years has recently left the company. For reasons I won't go into, the move was sudden and unexpected. He is in his early 50's, extremely smart, very employable, but his financial choices are questionable at best. I was very close to this person, and he would often share some very personal details of his financial situation. I have recently reread "The Millionaire Next Door," and I would say he is the perfect example of a hyper consumer. His financial situation is completely out of control. Overspending on just about everything from cars for his kids, last minute trips, and even a stretch-Hummer for one son's senior prom party. An overall complete disregard for the value of a dollar.

This person made a combined income of about $200K a year including his salary, his wife's salary, and a pension from the government. He was living paycheck to paycheck. I know this because he told me, as he would say, "most people live check to check." I didn't say anything about my situation. Don't get me wrong...I am hardly perfect, but not living check to check. He had convinced himself of a couple of things. One being, "most people live check to check" and that "it is impossible to get ahead." $200K a year and completely broke.

I work for a medium-sized corporation with a benefit of a retirement plan made up of a 401K, stock sharing plan, and a healthy match made in the form of cash and company stock. This is about 95% retirement money subject to all the rules and regulations you would expect. This person's account was just over $100K at the time of his departure. Again, I know this because he told me. He was contributing only 3% of his salary. When he told me his account was $100K, he framed the conversation in the terms of "you'll have this much some day, too." I kept my mouth closed as I usually do. I rarely disclose any personal money info (except on this blog).

This person left our company about 6 weeks ago and has recently cashed out of all retirement accounts. I imagine that after all penalties and taxes he is walking away with maybe half ($50K). To make things worse he has cashed out at the end of a tax year. Interesting enough, his financial move has come up at work. His former boss and my big boss asked how he was doing and if he had found another job. In my area, he could realistically find another job within about 4-8 weeks. Someone in the room replied, "he hasn't found another job, but he is OK because he cashed out of his 401K and he now has several months to figure things out."

I feel totally amazed at these comments. Not only is this person not okay and probably headed for financial ruin, but I am amazed that other people view this move as no big deal. Not only did all those taxes and fees have to be paid but he is most likely going to blow through this money in a few months. Even with a government pension of about $40K a year, he is in real financial trouble unless he makes some real changes.

If my wife and I both lost our jobs or even just one of us lost our jobs we would be worried. We would quickly hit the pavement looking for new work and slow down on all non-essential spending. Cashing out of even taxable accounts would be a last resort. The money we have saved has come from hard work and sacrifice. I would do everything I could to avoid spending it down on monthly expenses. I think what I have observed really comes down to a person's values. How they value money and really how they value themselves. A hyper consumer who thinks he is providing for his family by giving cars and lavish gifts, is really potentially leading them over the financial waterfall. Loving your kids (again, I don't have any yet) means making some tough decisions on what you are going to provide and what you are going to hold back - having some control over the situation and not being a victim.

I am left wondering why people who have made poor financial choices seem to be more inclined to bring them up in conversation as if these moves are okay. Are they trying to get reassurance? Should I speak up more about my opinions? I'm not for hiding one's mistakes, but at least admitting that they were an unfortunate financial move. Why is there a social awkwardness in admitting that you are saving as much as you can for your future? And really saying that if you are not saving for your future you are in danger of some pretty bad things?

"Millionairs in the Making"

I am debating about taking the links to CNN's "Millionaires in the Making" pages off my blog. Why am I highlighting some of these people? Some of these families are doing great. However, there seems to be a lot of stories written about families who are only one or two steps away from financial ruin. Why are these families being highlighted as financial successes? I enjoyed the new postings on the Millionaires in the Making for a long time but now I find myself quickly reading through the story to get to the juicy comments left by other people evaluating the true situation. Is it just me?

My house is worth what?

Over the past few months I have really been in tune with by balance sheet. One key point learned is if I move money from my asset column towards one of my liabilities there is no change in my net worth. The move cancels itself out so to speak. The only time paying down a liability will increase my net worth is when the funds come in from "new" money i.e. my paycheck and never hits the asset column first. (not sure if this is explained well).

So here is my concern. If I move some of my assets from a cash account to do some home improvements, how do I reflect that change in my homes value? I have my homes appraised value listed as the dollar amount under my asset column. I am trying to be conservative with the value of my home. Some of the improvement we would like to make are pretty solid. Things like new vanities and tile floor in the bathrooms should be a good investment. However, what should my change in our House Value be? How do I determine the change in my home's value?

I have spent some time on Trulia and Zillow doing some research on house values in my neighborhood. I have a few known facts to work from because some close neighbors have recently sold. Their homes have sold relatively quickly I might add. My conclusion is that these two websites may be totally inaccurate. Several homes that were listed as sold, to include mine, were listed at the wrong price. My house was listed as being sold for close to the original asking price but not for what we actually bought it for. This is a big deal because my wife and I bought our home for almost $30K less the asking price. We have since put close to $25K in home improvements back into our home.

I am pained by the idea of making what should be a good home improvement but not getting credit for it on my net worth balance sheet. I am considering a few options; 1. Getting my house appraised in a few months. We bought in May and have made major improvements to include new kitchen, flooring throughout, general cleaning, and totally repainted. However, it may be tough for an appraiser to adjust the house value because it has been such a short amount of time. 2. Having my real estate agent come back over and give me her best guess on what equity room I have left in the home.
Thoughts???

Smart Money Article

In the October issue of Smart Money magazine there is a great article about people who have "cashed out" of ther 9-5 jobs. They have done this by saving a tidy nest egg and lowering there living expenses. This is a great article and I would recommend it to anyone reading this blog.

The article highlights a few different couples who for one reason or another got sick of the daily grind, focused on there savings habits and started on a life less traveled. The article mentions a few books, one of them being, Cashing in on the American Dream: How to Retire at 35. I have added this book to my amazon wish list and intend on checking it out when I get a chance.

This article is rare in my experience. Most traditional money magazines focus on traditional things. Like, working until you are 65, max out your 401K and then retire. This article really tapped into the large group of people who are interested in doing other things with there lives other than go to work in a job they don't love. Some of the people highlighted, if not all of them, took up some other type of occupation that gave them more flexibility and enjoyment but maybe not the same paycheck. However, when you are not in a desperate need for a paycheck why should it be the most important factor.

One of the themes of the article is definitely lowering your living expenses. The concept being that you don't need to save as much or earn as much if your living expenses are low. Many of the couples were traveling the wold spending lots of time in Thailand or parts of Europe where your dollar goes a little further. I'm not sure my wife and I are willing to move to Thailand any time soon but the lesson of being flexible is noted.

My wife and I currently live in one of the more expensive parts of the country. We have purchased a home hoping that this investment will pay off over the next 5-10 years. We have no illusions of trying to retire in this area. It is simply to expensive. The strategy of moving to a less expensive area is a good one and one that my wife and I plan on using. It would be nice to eventually cash out of our higher priced home by moving to a less expensive one in a different area of the country. Maybe even renting again...
Below is most of the article from http://www.smartmoney.com/cover/index.cfm?Story=october2007

NO, IT'S NOT your imagination: You're working too hard. Bucking the trend in most developed nations, the American workweek has been growing longer. We put in an average of 1,815 hours a year — longer hours than even the Japanese, who have a word, karoshi, for people who die from overwork. The extra labor often translates into bigger salaries and more-secure retirements, but it also pours fuel on a fire as old as work itself: the dream of cashing out early.
While there's no way to quantify how many of us are eyeing the exits, evidence suggests that more people are taking the idea seriously. Books about early retirement are steady sellers, and virtual communities of would-be escape artists thrive on the web. Fortunately, it doesn't take an enormous nest egg to fund a life-changing move. We interviewed financial experts and early retirees to find out how to get out while you're young.
SUPER SAVERSNext May, Jay Arnold of Nashville, Tenn., will retire from his position as project manager at an auto maker — at 43. His wife Corinne has already left her job. They've got two young children, but they're not fazed: they've been saving aggressively for two decades. "Debt-free before our first child? Did it," says the confident Jay. Their secret: Supplementing their management-level salaries with part-time, self-employed work. They saved 30% of their take-home pay; after they paid off their house in 1998, they bumped that rate to 50%. The fruit of their labor: a savings hoard that's approaching $2 million.
For more tips on how to save for and make the most of an early retirement, plus tips on taking a buyout, turn to the October issue of SmartMoney Magazine.

Monthly Update for September 2007

Wow! Net worth up to $173,791.84. That's a change of $7,498 dollars or about a 4.5% increase from last month! Details listed on http://www.networthiq.com/people/VAContractor

I have been saving money for some time now but never really tracked my month to month progress in detail. This has been such a great learning experience for me.

A few notes on the month

• Over $2,500 dollars deposited into my ING account!


• Recovery of the overall U.S. Stock Market had a major impact to my mutual fund portfolio (retirement and taxable accounts)


• Limited draw down of liabilities other than the $339 from a mortgage payment
  

A few thoughts on the future

• Expect next month to be another good ING savings month.


• Expecting some additional income from travel reimbursements from work.


• Cash savings goal of $45,000. Within 6-8 months.


• Continue researching new investments for after cash savings goal is attained.