October 2017 Net Worth Update

Debt Ratio = Liabilities / Assets

I had never included this calculation as part of my net worth updates in the past.  The reason I find it intriguing, is because it really represents “How much of your lifestyle is financed by debt”?  As Warren Buffet nicely put it:

Only when the tide goes out do you discover who’s been swimming naked.

Those who are “swimming naked” have a high debt ratio.  Obviously if your debt ratio is lower, then you are going to be more financially stable if the markets (housing, stocks, etc.) crash.  I’ll continue to include the debt ratio.  Another nice thing about the debt ratio, is that once it is zero, you are completely debt free!

In September, overall, our Net Worth increased by $8979.06.  But most of this increase is simply from the increase in the value of our home.  Our investments made up for another large chunk of this, at about a 3k increase.  Normally our cash is mostly flat, but this month it went down since we had to replace our water heater, that is about 10 years old.

I’ll continue to post Net Worth updates now as Blog posts, rather than on the Net Worth page.

2017-09-01 2017-10-01 $ Increase % Change
Cash $35,744.02 $34,108.14 -$1,635.88 -4.58%
Investments $93,682.09 $96,835.90 $3,153.81 3.37%
Primary Property $466,844.00 $473,766.00 $6,922.00 1.48%
Investment Property $0.00 $0.00 $0.00 0.00%
Cars $11,617.00 $11,617.00 $0.00 0.00%
Total $607,887.11 $616,327.04 $8,439.93 1.39%
Primary Mortgage $258,499.91 $257,960.78 -$539.13 -0.21%
Investment Mortgage $0.00 $0.00 $0.00 0.00%
Credit $0.00 $0.00 $0.00 0.00%
Total $258,499.91 $257,960.78 -$539.13 -0.21%
Net Worth $349,387.20 $358,366.26 $8,979.06 2.57%
Debt Ratio 0.43 0.42 -0.01 -0.02

I decided it might be interesting to graph out both Net Worth and Debt Ratio over time:

Interestingly, there is a pretty constant trend upward in Net Worth.  However, the debt ratio shows a stark decrease (which is good), in June of 2017.  That is exactly when we sold our townhome.  Since our townhome had very little equity, it was mostly just a liability on our balance sheet.  That reinforces in my mind, that it really was a good idea to get sell it when we did.  Yet another reason why it is good to analyze many financial metrics, and NOT just your Net Worth.  You could have a Net Worth of 1 million, but still have 10 million in debt.  Looking at Net Worth, along side Debt Ratio is very informative.

The Quarter Million Mark

We did it!  We are finally millionaires! … or not.  We are a quarter of the way there though.  This month when we were doing our net worth update, we were a little surprised to discover that our net worth had exceeded $250k ($250,585).

Okay, I know that this is not very impressive for a couple of 34-year-olds.  But, when you look at what our net worth was 8 months ago, at $146,969, then I am encouraged.  It is awesome to think that our net worth has gone up by more than $100k in the last 8 months.


How did our net worth go up by $100k in 8 months?  In looking over the history, $50k of the increase was due to property values increasing ($40k on the primary residence, and $10k on the investment property).  But what about the other half?  Another $27k in net worth increase came by paying off my student loan.  That is the beauty about net worth calculations, is that they take into account paying off debt, which is avery important part of the equation.  Another $11k came from both contributions and other increases in retirement funds.  Lastly, we also paid off $6k in mortgages.

It would be great if our net worth continued to go up at this rate for the next 10 years, but I know that this is not realistic, given our current portfolio.  Either way, we’ll keep at it and hopefully see our gains continue.  I am very greatful that even with a single income, we are able to support or family of 5 kids comfortably.  We don’t live extravagant lives, but we feel we are never left wanting.  We attribute this to our Faith in Jesus Christ and his commandments.  We always pay our tithing, and trust that the Lord will take care of our needs.

What is Your Net Worth?

What is the single most important financial number for your personal finances?

I would argue that the most important personal financial number is: the amount of money you need to retire.  In Chris Hogan’s “Retire Inspired” book, he calls this your Retire Inspired Quotient (R:IQ).  What is that?  You could phrase this as “How much money do I need to retire?”  But that is not correct either.  If your assets are diversified across real estate, precious metals, stocks, etc., then it really is not how much “money” you have, it is how much your assets are worth.  However, this still is not correct either, because if you have a huge amount of loans that offset all of your assets negatively, then you really are not ready to retire.  Really what we are talking about is: How much money would be in your bank account if you were to die today and all of your assets were sold, and all of your loans were paid off from the proceeds.  The financial term for this is net worth.

Okay, so really what we are saying here, is that the single most important financial number is: The net worth I need to reach in order to retire. This means that the second most important financial number is your current net worth.  If you know both of these numbers, then you now know how close you are to retirement as a percentage.  For example, currently, I know that I am 7% of the way toward retirement.  The reason I know this is due to these two numbers:

R:IQ: $3,500,000
Net Worth: $242,299

If I just divide these two numbers (242,299 / 3,500,000 * 100 = 6.9%) we quickly arrive at the 7%.  At first, this may be discouraging.  But, what I have found, is that once you start tracking your net worth over time, it can actually be quite encouraging as you see your assets increase in value, and your liabilities decreasing, causing your net worth to quickly explode (in a good way).

How do you calculate these two very important financial numbers?  How can I calculate my R:IQ?  You can calculate your R:IQ using Chris Hogan’s website.  But honestly, that site just tells you the final number.  It doesn’t show you any pretty graphs or anything.  But it is good if you just want something to start with.  Another good site is bankrate.com.  Thebankrate.com calculator will actually show you a graph like the one below.  I like that bankrate uses a more conservative 7% rate of return rather than the aggressive 12% rate of return that Chris Hogan’s site uses.  The graph below shows your money building up as you save for retirement, and then finally the decline as you take money out of retirement.  This can also help you to know if you are on track throughout your income earning years.

How can I calculate my net worth?  Your net worth is defined as the sum of all of your assets minus the sum of all of your liabilities:

Net Worth = Assets – Liabilities

Simple right?  It really is that simple.  But what is an asset?  An asset is anything that you personally own which someone would pay you for.  Common assets are: 401k’s, IRAs, savings accounts, cars, houses, etc.  Similarly, financial liabilities are generally money that you owe to other people.  Common liabilities are: mortgages, student loans, car loans, money borrowed from family members, etc.  Let’s look at an example over the last 2 months:

8/1/2016 9/1/2016
Primary home $430,718.00 $430,101.00
Investment properties $158,992.00 $161,812.00
Retirement accounts $47,139.47 $51,747.15
Savings accounts $2,005.03 $4,275.31
Cars $10,721.00 $10,622.00
Total Assets $649,575.50 $658,557.46
Retirement Assets $218,857.50 $228,456.46
Primary mortgage $265,372.53 $264,852.73
Investment mortgages $151,662.18 $151,405.19
Student loan $0.00 $0.00
Car loans $0.00 $0.00
Total Liabilities $417,034.71 $416,257.92
Retirement Liabilities $151,662.18 $151,405.19
Net Worth $232,540.79 $242,299.54
Retirement Net Worth $67,195.32 $77,051.27

In the above example, you can see that I created two overall categories, “Net Worth” and “Retirement Net Worth”.  The reason I did this, is that there are some assets which you would not sell when you retire, so you can’t count them toward your retirement savings.  For example, I excluded our primary home from the list of Retirement Assets, since I do not plan on selling my primary home when I retire.

What tools can I use to calculate net worth?  As you can see above, I just use Excel (Google Drive).  Some websites, such as mint.com will do this for you, but do not seem to work that well.  Maybe at some point I’ll create a web site which does this in a clean way.

Net worth can be a useful tool in helping you to make financial decisions.  For example, when you use cash to buy a car, what would be the impact on your net worth?  The day you buy the car, for example, you could take $21,000 out of your savings account and walk home with a brand new car worth $21,000.  At the instant you bought the car, your net worth didn’t really change.  You lowered your savings account asset by 21k, but you added a new asset worth 21k.  However, after 6 months or so, that car has probably depreciated at least a thousand dollars in value.  So, your net worth has likewise gone down by a thousand dollars, which hopefully you are making up for in other areas.

Lastly, you’ll notice that I posted a lot of information in this post about my personal finances.  For whatever reason, details about personal finances are a taboo subject in America.  As Americans, we are very quick to show off our nice cars and homes.  But we are very private about all the debt we incur to get there.  Personally, I think it can be helpful to learn how others are winning with money and what has worked for them.  Everyone is in different financial stages of life, but I think we all have something to learn from each other.  Please share your insights and things you have learned along the way in the comments below!

If you are not already tracking your net worth, then start now!  It is hard to do retroactively, but easy to do in the present.  Good luck!