Am I miscalculating this? Net Worth question

[riverwed070707]

Hey savers! I am taking a stab at making some long-ish term goals - personal, financial and professional. Turning 30 next year and I wanted to set a goal for where my net worth will be in 5 and 10 years which led me to figuring out at what rate my net worth has been growing since I started tracking it. Let me preface by saying that I'm not a math person. I was an english major and I get paid to mark up commas.

Quick stats:
Current NW: $186,000
End of 2014: $170,500
End of 2013: $119,600
End of 2012: $75,200

So back to calculating annual growth. Initially, I was dividing the end one year by the end of the following year to get a percentage that's consistently between 60-70%. So if, for example in 2013 my net worth was 70% of my 2014 NW, then is that 30% growth or am I way off the mark in how I'm calculating? Feels like a crazy high percentage and when I look at continued growth of 30% I come up with somewhere over $800k by 35 and $3.4m by 40... that can't be right. Seems too easy. Help?

Tried googling for some future nw calculators but I don't really want to take the time to figure and enter my current earnings, savings, etc.

[doingitallwrong]

It's even higher. You take the difference from year 1 to year 2 and divide that by year 1 -- so for 2013-2014, your net worth increased by $50,900. Divide that by your starting point, 2013 at $119,600 and you have an increase of 43%. (You can double check that by multiplying your starting number (2013) by 1 + your calculated growth; in this case, 1.43 (or technically 1.4255, I rounded up). The result should be close to your ending number (2014).)

Which may or may not make sense, depending on what you're including in your net worth.

If you're contributing a significant amount to savings/retirement/investments, those contributions are part of that 43%. It's still an increase in your net worth, but not what most people think of as "growth". (For example, if you put the max of $17,500 into a 401(k), that brings your 'return on investment' increase down to $33,400, which is 28% of your 2013 value.) The stock market grew 11.4% in 2014, so if you're invested in stocks you'll have seen a similar increase in those accounts. Home values are increasing, and depending on where you're getting the number (if you're using your home value in your net worth) it may be reasonable or wildly under- or over-stated.

I would not count on 11-12% stock market growth over the long term; the average over the entire life of the market is around 7.5% so IMO that would be a safe number to use for market accounts.

[riverwed070707]

It's even higher. You take the difference from year 1 to year 2 and divide that by year 1 -- so for 2013-2014, your net worth increased by $50,900. Divide that by your starting point, 2013 at $119,600 and you have an increase of 43%. (You can double check that by multiplying your starting number (2013) by 1 + your calculated growth; in this case, 1.43 (or technically 1.4255, I rounded up). The result should be close to your ending number (2014).)

Which may or may not make sense, depending on what you're including in your net worth.

If you're contributing a significant amount to savings/retirement/investments, those contributions are part of that 43%. It's still an increase in your net worth, but not what most people think of as "growth". (For example, if you put the max of $17,500 into a 401(k), that brings your 'return on investment' increase down to $33,400, which is 28% of your 2013 value.) The stock market grew 11.4% in 2014, so if you're invested in stocks you'll have seen a similar increase in those accounts. Home values are increasing, and depending on where you're getting the number (if you're using your home value in your net worth) it may be reasonable or wildly under- or over-stated.

I would not count on 11-12% stock market growth over the long term; the average over the entire life of the market is around 7.5% so IMO that would be a safe number to use for market accounts.

Interesting and good point on using the term "growth". My numbers only include property value, cash, debt and retirement savings but what I defined as growth definitely reflects what we're currently contributing to retirement as well as what we're paying down in our mortgages each year in addition to the stock growth. In 2012 we were still paying down a good chunk of debt so much of the changes there were in losing debt vs gaining savings. While we don't max retirement now, its definitely a higher contribution (both from percentage contributed and salary jumps that arent likely to be reflective of annual salary increases). Knew when I started running numbers it wasn't going to be an exact, was just curious for a ballpark so I can start figuring out when I can quit the corporate gig to travel full time

[autoxer]

I also did some projections to see when I can quit the rat race.

I wanted to account for inflation also, because although your investments may increase by 7.5% per year, your spending power erodes, so I figure I will get about 5% real growth after deducting for inflation. So each year, I figure 5% growth and then add how much I expect to save from my income.

[97guns]

its always fun to try and figure where your NW will be in the future. at your age you may be able to retire by 40 or much sooner if your investments stay the course and you are able to put the funds to use by making a monthly income from it because you wont be drawing on any retirement funds at 40.

think about liquidity at your young age unless you want to work to 59 1/2 or whenever it is that you can draw on your 401K. keep em liquid so you can put them to use later, have your money make you money instead of working for money.

[corn18]

Cumulative Annual Growth Rate (CAGR) is what you are looking for.

CAGR = (186000-75200)/75200/3 years = 49% CAGR

You might think you should divide by 4 years vs. 3 years, but you count the periods of growth, not the number of years in the list (kind like counting the space between the fence pickets, not the number of pickets).

If you want to know the future value of 186,000 at a CAGR of 49%:

FV = 186,000 * 1.49^(#of years)

So, 10 years later,:

FV = 186,000 * 1.49^10 = 10,031,725

Your CAGR is high right now because the percentage of contribution is high relative to the total net worth. As your net worth grows, you will need to significantly increase contributions to maintain the same percentage. Or find an investment that yields 40%+. That means when you hit 1,000,000 net worth, you will need to either contribute $490,000 that year and/or grow 49% that year to maintain a CAGR of 49%. That is not realistic, so forecasting future net worth based on current growth rates is folly.

[Singuy]

I believe the fact that you are looking at your net worth growth as a percentage is wrong. You cannot divide one year's net worth by another and get a growth percentage and except that to remain the same x 10-30 years.

For example, let say you are saving 30k/year, your 401 contribution is 15k/year and growth on that is 6%.
The percentage of growth is super high when you are looking the numbers between 2013 and 2014 when the number for 2013 is 100k and 2014 is 150k.

When you have 500k in net worth, adding 50-60k to that the next year doesn't yield you the same % of growth when you went from 100k to 150k.

But hey, if you some how ends up with a 30% growth then yes, in 10 years you will have 4 mil easy..but 30% growth is a HUGE difference than 30k growth.

When you have 1mil, 30% growth means that in 1 year, you'll have a 300k growth..which is way more than you can ever save. I would love for my money to grow in a percentage in the 30s or even the 20s...but that's just wiseful thinking.

[feh]

I believe the fact that you are looking at your net worth growth as a percentage is wrong. You cannot divide one year's net worth by another and get a growth percentage and except that to remain the same x 10-30 years.

+1

I don't see the purpose of trying to predict your NW. I know what our NW is, but to me, it is just a snapshot of your current financial situation. It's not something that needs to be predicted.

I can see the value of attempting to predict what your retirement savings will be, but even that endeavor will have huge variations, because you don't know what market returns will be. Nor do you know if your future contributions will rise or fall.

If you want to get a feeling for how your retirement savings may change over time, use a tool like firecalc.com and look at the median outcome. Don't use a fixed percentage every year.

[riverwed070707]

Thanks for all the insights. As noted I'm not a math person - some of those examples were exactly what I was looking for to get some perspective about why the numbers were coming out so high. Main goal was just for some benchmarking for buying additional rental properties - aiming to have $5k in passive income by 35 while maintaining our current jobs/level of income and at that point reevaluating whether we need to be in the office 40+ hours a week or if we can start shifting toward less pay for less hours. Totally understand why it's not a hard predictor of where we will be