Percentage increase in net worth

[KTP]

We have started to track our net worth setting a goal of $1.6 million before we early retire (that is about the minimum I am comfortable withdrawing 3% for income). This would provide $48,000 before taxes and we are currently living on $36,000 after taxes (but with free healthcare through work). Anyway, that was not really the point of this thread.

The interesting point is the average increase in net worth needed to meet this goal in 5 years. For us it requires increasing our net worth by 1% a month, through additional savings + investment returns. I am curious if any of you are tracking net worth and what the average monthly percentage increase (or decrease, ack!) you are seeing? We are including the house in the net worth because we will be selling it and renting during retirement, and I have prepayed a lot so it doesn't seem fair not to include it in our net worth. I did value it at only 80% of FMV to be safe.

We have only tracked now 4 months, so it means little, but we are managing a 3% average increase per month so far. I am expecting a negative month anytime now to balance that out a bit

[MonkeyMama]

Interesting.

I track mine on a more annual basis. For the house, we just use the assessed value. (Assessments can only go up 2% per year, but can go as low as home values). Do it this way to erase volatility from balance sheet (during wild appreciation). But, can't ignore the losses.

As such, we took a hit 2 years ago due to the stock market. The last 2 years, our home value took a hit. (Not that it didn't take a hit before, but assessed value didn't decrease until 2009, since fair market value was far above assessment until that point).

My goal has been to increase net worth by about 15% per year. Succeeded in 2007, but net worth was rather stagnant for 2008 - 2010.

[Slug]

Interesting topic. I've been tracking my net worth for a while and just started a monthly post on it for my blog to keep me focused on my interim goal of $1 million. I, however, have not set a date for that goal to be reached and how much I would need to increase my wealth per month to make that happen. If I assume a 1% monthly compounded growth rate it looks like it'll take 11.5 years so I'll be a millionaire in 2022. Since I won't be retiring until 2039, I'll just take this as a sign I'm in OK shape. To reach it in 10 years, I'd need 1.16%. Perhaps I'll set that as a goal. Of course what's $1 million dollars worth in 2021 in today's dollars? Still, an interesting exercise. Thanks!

[KTP]

Originally Posted by Slug

Interesting topic. I've been tracking my net worth for a while and just started a monthly post on it for my blog to keep me focused on my interim goal of $1 million. I, however, have not set a date for that goal to be reached and how much I would need to increase my wealth per month to make that happen. If I assume a 1% monthly compounded growth rate it looks like it'll take 11.5 years so I'll be a millionaire in 2022. Since I won't be retiring until 2039, I'll just take this as a sign I'm in OK shape. To reach it in 10 years, I'd need 1.16%. Perhaps I'll set that as a goal. Of course what's $1 million dollars worth in 2021 in today's dollars? Still, an interesting exercise. Thanks!

And for any of you others who would like to calculate this but may not understand compounding, you can do a simple math operation on most any calculator.

For instance, 1% a month for 60 months, compounded monthly, is equal to 1.01 raised to the 60th power. On your calculator that might be something like x^y where x = 1.01 and y = 60 months.

for my case, 1.01^60 = 1.817, meaning I would increase my net worth to $1,817,000 in 60 months if I started with 1 million and managed to increase it 1% a month for 60 months. Of course since we are compounding monthly it is harder to figure out an average per month increase if we are compounding monthly. I would have to think about that a bit. For example, if you had a 60% increase in your net worth the first month, and then the following 59 months had a 0% increase, it would look like you had an average of 1% per month increase in your net worth over the 60 months, but you would only have $1.6 million from your 1 million instead of 1.817 million.

Sorry for any confusion

[kork13]

I actually have been tracking it for a little over a year now... However, because I have a much lower net worth than you right now, what might be a similar dollar amount is a much higher % increase... The monthly increase has varied widely for me (due to moving reimbursments/settlements, promotion/pay increases, gifts, etc), but it's been anywhere between 1% and 20%. Most months between 4-6%, but the total average is 13% per month. While those numbers may seem outrageous, temper that with the fact that I only just got into the 'positive' net worth about 18 months ago, and between savings, investment gains, and unexpected cash infusions, my net worth has gone up by an average of about $5000/mo.

[littleroc02us]

Here is what I user to calculate compound interest with contributions made monthly, which when calculated with other assets and liabilities will result in my net worth.

So How Does Your Calculator Work?

In order to calculate compound interest based on an initial balance and a monthly contribution, you combine two compound interest formulas:

* Capital Accumulation Formula: FV = ( (1 + i)n ) * PV
* Future Value of a Series Formula: FV = PMT * ( ( (1 + i)n - 1) / i )

Where:

* FV = Future Value
* PV = Present Value
* PMT = Periodic Payment Amount
* i = interest rate per period
* n = number of periods

So, the calculator takes takes the Future Value of a Series and adds it to the Capital Accumulation Formula, based on the input your provide. What’s the answer to our hypothetical situation then? Let’s plug in the numbers and see out it works out…

* FV = ?
* PV = $100
* PMT = $10
* i = 3%
* n = 12

Total = [ Capital Accumulation Formula ] + [ Future Value of a Series ]
Total = [ ( (1 + i)n ) * PV ] + [ PMT * ( ( (1 + i)n - 1) / i ) ]
Total = [ ( (1 + 0.0025)12 ) * 100 ] + [ 10 * ( ( (1 + 0.0025)12 - 1) / 0.0025 ) ]
Total = [ 1.0304159 * 100 ] + [ 10 * ( 0.0304159 / 0.0025) ]
Total = 103.04159 + 121.6636
Total = $224.71

Note that the the 3% has been translated into 0.0025. This is a simple calculation: 3 / 100 / 12 = 0.0025. We first divide by 100 to make this a decimal percentage, and then we divide by 12 to see the interest rate that is paid to our account each month.

[jIM_Ohio]

Originally Posted by KTP

We have started to track our net worth setting a goal of $1.6 million before we early retire (that is about the minimum I am comfortable withdrawing 3% for income). This would provide $48,000 before taxes and we are currently living on $36,000 after taxes (but with free healthcare through work). Anyway, that was not really the point of this thread.

The interesting point is the average increase in net worth needed to meet this goal in 5 years. For us it requires increasing our net worth by 1% a month, through additional savings + investment returns. I am curious if any of you are tracking net worth and what the average monthly percentage increase (or decrease, ack!) you are seeing? We are including the house in the net worth because we will be selling it and renting during retirement, and I have prepayed a lot so it doesn't seem fair not to include it in our net worth. I did value it at only 80% of FMV to be safe.

We have only tracked now 4 months, so it means little, but we are managing a 3% average increase per month so far. I am expecting a negative month anytime now to balance that out a bit

LOL interesting study, and I don't think you want my tangent to derail your thread.

A good measure will be the volatility of your net worth, and also tracking your liquid net worth different from total net worth.

My logic is this...

based on needing 48k before or 36k after taxes, if you have 1.6 M net worth, but 500k of this is tied up into your (paid off) house, then its really the 1.1 M liquid net worth which concerns you...

second issue is that what you do not want are net worth swings of 10% (might even be 5%) really close to needing to tap the money...

you could be moving along for 55 months making 1% gains per month, but then a 40% market swing happens and wipes out a decent chunk of your liquid net worth.

IMO you are making the problem overly complex by retiring with a specific net worth... my contrary opinion is simple:

Know current expenses... if those expenses (with mortgage) is 60k per year, then you want 60k times 25 or 33 (25=4%; 33=3%) for a specific withdraw rate. If house is paid for, recalculate that 60k (down to 48k or 36k) and do the same 25X or 33X calculation.

My logic is this... paying off house is about risk, leverage and liquidity. Each of those has positives and negatives (based on your risk tolerance). But in most cases the net worth over a short period of time would not change (the difference in 5 year net worth would not be much).

If you had 25X expenses but still had mortgage, you telling me you would not find a way to make that work (if the 25X covered the mortgage payment)?

[MonkeyMama]

Yeah, I have to add my goal to increase net worth is more dollar amount than percent. My goal has been to increase my net worth by 50% of my expenses, every year.

I had read an article about how increasing your net worth is not linear. It will grow more slowly in the beginning, and faster as your assets increase. Anyway, it was recommended by the time you reach your 40s, that your net worth increase by 50% of your income (or expenses) on an annual basis. I chose to measure in terms of expenses, because our income has been all over the place while our expenses remain rather consistent. (I am in my 30s, but was just aiming high!)

Needless to say, even if I put away 50% of my expenses every year, the economy has made it hard to reach that level. WE have a lot in savings, but interest rates are abysmal. The stock and housing markets haven't fared well either, obviously.

I forgot to mention that this year was also hampered by a 10% cut in compensation. My spouse isn't working at the moment, and hasn't in many years, but I expect he will pick up some of the slack next year. For this year we had to let it go. We also both had a lot of medical expenses for '10/'11 (I am due for surgery in January). In addition to a significant reduction in my benefits, I haven't been able to work as much overtime as usual with all this medical stuff. I'd say it hasn't been the best of times for us... But I can still grow my net worth by $20k-$30k next year if my house value stops falling!

I have learned to step back on the net worth and watch it for the long term. It may mean little on a daily or monthly basis. For the long run, there will be dips, but forward progress overall is what I strive for. I find it very helpful to look at the big picture, which is why I do track net worth and set my goals in relation to the big picture.

[KTP]

Well, it was just something we were doing to check our progress. Obviously my DW will not leave her 200K a year job in 5 years if our portfolio suddenly drops 40%, which is why I am willing to go balls to the wall on investing our liquid assets into areas that will historically return an average of 9% or more (ie, stocks). Some of it I am picking and choosing, large caps paying handsome divys like Altria and Merck in our taxable account, but a large chunk is tied up in a 401K where I have it in 60% large cap Vanguard and 40% in small cap Vanguard. Adding 21,000 a year to the 401K via max contribution + employer match. The house value is not that huge...we owe 150K on a house we paid $300K, and could probably sell for $350K tommorow, but I am only valuing it at +150K to our net worth. Additional saving is 10K a year into IRAs and 60K a year into taxable account, so mostly saving is what makes up the 1% per month. Argh, this got derailed...darn you Jim, I thought you were not going to post anymore because you took some elite accounting job...

[snshijuptr]

Over the past year our monthly percentage change in liquid net worth (the only one I really care about) has ranged from -31% to 159%. Still, we are just starting out so over the past year our net worth has grown from ~$4,000 to ~$35,000. The -31% was the addition of a student loan.

I focus on increasing my "multiplier" based on the idea of needing 25X to retire. So basically every month I calculate my liquid net worth to get my assets, and I multiply that months expenses by 12 to get my expenses. I then divide my assets by my expenses. My multiplier in January was 0.10 and in November is was 0.81. My gains range from -0.20 to .20 with an average gain of 0.07 per month.

This way I get a boost from both lowering my expenses and raising my assets. Additionally, over time it doesn't get so much harder to increase. Finally the math is really simple. If I need 25X and I'm gaining .07X per month then it should take around 30 years to gain what I need. Sadly, most of the money I'm saving is going to go toward some big expenses, not financial independence. Still, I console myself with remembering that our income will probably increase faster than our expenses.

[EDIT] The math to determine years to goal is actually (Goal - Current)/Rate so for me (25 - .81)/.07 = 28 years

[JuniorTT]

I started tracking net worth in 2006. Here are our annual increases since then:

From end of '06 to end of '07: 53%
From end of '07 to end of '08: 29%
From end of '08 to end of '09: 57%
From end of '09 to today: 33%
Compounded total from end of '06 to today: 415%

But we are pretty young (turned 30/31 this year) and have decent salaries for our age so it's not too hard to build wealth quickly.

[KTP]

It is a very interesting thing to track.

At the start, the % increase is all savings, and toward the end, it is probably mostly investment returns. I wonder where the inflection (i think that is the right word) point is for most people.

If you start with $1, I imagine pretty much over 100% increases in net worth for hopefully a few years lol.

For us, we are putting in about $85K a year, currently have around 750K liquid and 150K of value in our house (minimum). So we are right there at the point where the investment returns could exceed our saving % each year. Toward the end of the supposed 5 year period I would think our investment returns would definately exceed our saving rate (1.6 mil throwing off 6% return would be increasing $96K a year). Hmmm, it sure is tempting to work another 2 or 3 years and get that to 2 million...then you say, well gee, another 5 years and I could have 3 million, or hey if I work until 80 I could have $15 million. Gotta stop somewhere.

[scfr]

Mid-06 to Mid-07: 18%
Mid-07 to Mid-08: 1%
Mid-08 to Mid-09: 16%
Mid-09 to Mid-10: 16%

We calculated our net worth prior to mid-06 but did not keep as detailed records.

For my "How are we doing?" checks, I prefer using Dr. Stanley's (author of The Millionaire Next Door & The Millionaire Mind) formula for Expected Net Worth:
Age x .112 x Income = Expected Net Worth
If you are 2 times your expected net worth, then you are "Balance Sheet Affluent" (BA).
My goal is to be BA by the time my husband is 50, which is only a few years away.

[Slug]

Originally Posted by scfr

For my "How are we doing?" checks, I prefer using Dr. Stanley's (author of The Millionaire Next Door & The Millionaire Mind) formula for Expected Net Worth:
Age x .112 x Income = Expected Net Worth
If you are 2 times your expected net worth, then you are "Balance Sheet Affluent" (BA).
My goal is to be BA by the time my husband is 50, which is only a few years away.

I'm .5 times my expected net worth. I guess I'm BP (Balance Sheet Poor). Back to the grindstone...

[feh]

I don't really "track" it, but I see the number in both quicken and on mint.com. I have to admit it was fun when we became the "millionaires next door" a few years ago.

If I were to track it, I'm sure it would pretty much follow the stock indices. We've acquired enough funds that the changes in market value are much larger than any monthly contributions we make.

[snshijuptr]

Originally Posted by scfr

Age x .112 x Income = Expected Net Worth

At 25 with a $70,000 combined salary, we're supposed to be at $188,160. Our income multiplier is 2.688. We've only been working 3 years! I think that formula might assume a much older group

[littleroc02us]

If any of you have read "The Millionaire Next Door" it's basically a study that was done on self made Millionaires and DecaMillionaires to try and figure out how they got to be so successfull. His formula was this and it is a reality check to see where you are at.
Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

[MonkeyMama]

Originally Posted by snshijuptr

At 25 with a $70,000 combined salary, we're supposed to be at $188,160. Our income multiplier is 2.688. We've only been working 3 years! I think that formula might assume a much older group

Exactly. This is why I use my formula. MND forumlas are very linear, and fine when you are older, but not very helpful to the young. (I also find the "income multiplier" useless in that formula. This is only useful if your income is steady or steadily increasing. For many people, that just doesn't happen. Between my spouse deciding to stay home and me taking of months for a couple of maternity leaves, our income has jumped up and down a lot in recent years).