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livingdebI enjoy calculating my net worth each month. (Okay, daily). It's a pretty good snapshot of financial health, if one takes into account age (lower net worths are still healthy for younger people) and income (lower net worths are okay for lower incomes).
But it's only a snapshot, not so great for measuring your long-term financial health. For example, someone with a net worth of -$40,000 could be in better financial shape for the long term than someone with a net worth of +$10,000, assuming both people are the same age, and the first one has a college degree that will help them get a high-paying job they will love and the second one has no degree and can only get a low-paying job they love.
I remember when I made my first calculation of net worth. I was hoping it would be positive, but I really didn't know if it would be. It was! So calculating my net worth has been fun from the very beginning.
My favorite description of how to calculate net worth is the one in Joe Dominguez' and Vicki Robin's Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence. They make a case that the best way to calculate your net worth is to find the market value of everything you own. First inventory your possessions. Then you assign each a value, probably based on what you could get at a garage sale or on E-bay. That includes your blender, your three socks that don't have matches, your paper clips. Everything. Then you subtract everything you owe to anyone. After going through this process, some people find that if they sell enough of their stuff and put the proceeds in US Treasury Bonds, they can live off the proceeds.
I don't have that much stuff, and the stuff I have is too junky. Still, the exercise is also valuable in showing how you've spent your money in the past. You may also notice you have a lot of things taking up space that you don't even want. And of course that list could come in handy if you need to make a large claim on your insurance. Nevertheless, I have not done this.
My net worth calculation is conservative (estimated too low). I include:
*the value of my house (what the tax assessor estimates--which is too low--minus what I still owe)
*what's in my retirement accounts
*what's in my other savings and investment accounts
*my vacation time (if I quit, I get the value of my saved up vacation time times my hourly wage)
*my car
Currently, the percentages look like this:
house - 44.5%
retirement - 45.5%
other savings - 5.5%
vacation - 3.5%
car - 1%
My retirement accounts finally surpassed my house value this year, which I like. However, I have less in savings. I think those changes might be purely because of the extra year of service I bought, though.
Over the past year, my net worth has increased 20%. Awesome! The amount of that increase is equal to 85% of my salary (from my regular job, not counting scoring exams). Also awesome! But I assure you that I am not saving 85% of my income. For example, only 25% of the increase in the value of my house came from my paying down the mortgage. And only about 60% of the increase in my retirement funds came from my deposits. Some people say the first $100,000 is the hardest, and it's true that once you hit that mark, it's a lot more fun to check on your changes in net worth.
Okay, that sounds good. But how good is my net worth given my income and age? The measure I see most commonly is from Thomas J. Stanley's and William D. Danko's The Millionaire Next Door. They say that your net worth should be at least one-tenth of your current income times your age, and that ideally it should be double that. Mine is not double that--it's about 5% more than that. (Last month, before I got my raise, it was 17% more than that.)
Experts agree that these estimates are unrealistically high for young people and unrealistically low for retirement-age people. I guess it's still reasonable for me. So by that measure I'm doing fine but still have plenty of room for improvement.
I also have another calculation I do. I take the amount of money that Social Security claims I have made each year based on the statement they now send annually. Then I calculate how much my net worth would be if I had been saving 15% of my income the whole time and earning 10% (interest or capital gains) on my savings. My actual net worth is now 36% above that figure. That makes it sound like I am doing a wonderful job.
There's one more related measurement I like to take. I feel like I'm on track to perfectly accomplish my goals of owning a house, having good retirement plans, and having enough savings and insurance to take care of any problems that come up (except having to move to a nursing home). So the only thing left is my "fantasy savings" (additional savings that can go toward early retirement and/or buy a better house or better-located house).
To measure my progress in this area, I first add up all the money in my non-retirement accounts. Then I subtract the amount I've officially set aside over the months for car repairs, for purchasing my next car, for house repairs and renovations, for charity, and for "long-term fun" (vacations and expensive toys like computers). Over the last year, that number has gone from -$352 to -$4169.
I guess a little discussion of negative numbers is in order here. Even with that big of a negative number, I still have plenty of savings to cover problems so long as they don't all happen at once. So basically, I have borrowed the money from my new car fund and 1/3 of the money from my housing fix-up fund for other purposes. Last year it was to lend money to the unemployed. This year it was to buy an additional year of service (which is part of what I wanted this money for). Having enough savings to borrow from yourself is a wonderful thing.
If you add the amount I spent on buying that year of service, that second figure changes to +2216 for a total increase over the year of $2568. At first I was thinking that wasn't so great, but it's significantly more than the original maximum contributions to IRAs use to be, so I guess that's a good start. (I will feel a lot better when that number gets positive again, though.)
So, my net worth snapshot looks pretty good. My long-term financial health seems like it's doing pretty well, too. There's one final thing. Because if you're saving too much money, you might not be having enough fun now. Let's measure the fun I've had over the past year.
Things I've spent lots of money on include a trip to London last November, a new laptop computer this summer, and a totally cool new oven. Other fun things I've done is go to parties of my friends, read more fiction than I've read in a long time, watch lots and lots of movies, learn to crochet, become a daily blogger, and decide to write a novel. I wish I were doing more exercise, practicing musical instruments more, cooking more, and having more parties, but those are more about not having enough time than not having enough money.
Edited to add that I read that millionares save 20% of their income. I decided to use that figure plus 10% interest/capital gains to calculate a goal (instead of the 15% figure above), wondering what would happen. It turns out that my net worth for this month is 4% above that goal. Also, I just surpassed that goal this year when the new housing assessments came out. Woo hoo! I am just like a millionaire. Or a small portion of one. Or a youngish future one. Except for the part where I'm going to retire too young.
But it's only a snapshot, not so great for measuring your long-term financial health. For example, someone with a net worth of -$40,000 could be in better financial shape for the long term than someone with a net worth of +$10,000, assuming both people are the same age, and the first one has a college degree that will help them get a high-paying job they will love and the second one has no degree and can only get a low-paying job they love.
I remember when I made my first calculation of net worth. I was hoping it would be positive, but I really didn't know if it would be. It was! So calculating my net worth has been fun from the very beginning.
My favorite description of how to calculate net worth is the one in Joe Dominguez' and Vicki Robin's Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence. They make a case that the best way to calculate your net worth is to find the market value of everything you own. First inventory your possessions. Then you assign each a value, probably based on what you could get at a garage sale or on E-bay. That includes your blender, your three socks that don't have matches, your paper clips. Everything. Then you subtract everything you owe to anyone. After going through this process, some people find that if they sell enough of their stuff and put the proceeds in US Treasury Bonds, they can live off the proceeds.
I don't have that much stuff, and the stuff I have is too junky. Still, the exercise is also valuable in showing how you've spent your money in the past. You may also notice you have a lot of things taking up space that you don't even want. And of course that list could come in handy if you need to make a large claim on your insurance. Nevertheless, I have not done this.
My net worth calculation is conservative (estimated too low). I include:
*the value of my house (what the tax assessor estimates--which is too low--minus what I still owe)
*what's in my retirement accounts
*what's in my other savings and investment accounts
*my vacation time (if I quit, I get the value of my saved up vacation time times my hourly wage)
*my car
Currently, the percentages look like this:
house - 44.5%
retirement - 45.5%
other savings - 5.5%
vacation - 3.5%
car - 1%
My retirement accounts finally surpassed my house value this year, which I like. However, I have less in savings. I think those changes might be purely because of the extra year of service I bought, though.
Over the past year, my net worth has increased 20%. Awesome! The amount of that increase is equal to 85% of my salary (from my regular job, not counting scoring exams). Also awesome! But I assure you that I am not saving 85% of my income. For example, only 25% of the increase in the value of my house came from my paying down the mortgage. And only about 60% of the increase in my retirement funds came from my deposits. Some people say the first $100,000 is the hardest, and it's true that once you hit that mark, it's a lot more fun to check on your changes in net worth.
Okay, that sounds good. But how good is my net worth given my income and age? The measure I see most commonly is from Thomas J. Stanley's and William D. Danko's The Millionaire Next Door. They say that your net worth should be at least one-tenth of your current income times your age, and that ideally it should be double that. Mine is not double that--it's about 5% more than that. (Last month, before I got my raise, it was 17% more than that.)
Experts agree that these estimates are unrealistically high for young people and unrealistically low for retirement-age people. I guess it's still reasonable for me. So by that measure I'm doing fine but still have plenty of room for improvement.
I also have another calculation I do. I take the amount of money that Social Security claims I have made each year based on the statement they now send annually. Then I calculate how much my net worth would be if I had been saving 15% of my income the whole time and earning 10% (interest or capital gains) on my savings. My actual net worth is now 36% above that figure. That makes it sound like I am doing a wonderful job.
There's one more related measurement I like to take. I feel like I'm on track to perfectly accomplish my goals of owning a house, having good retirement plans, and having enough savings and insurance to take care of any problems that come up (except having to move to a nursing home). So the only thing left is my "fantasy savings" (additional savings that can go toward early retirement and/or buy a better house or better-located house).
To measure my progress in this area, I first add up all the money in my non-retirement accounts. Then I subtract the amount I've officially set aside over the months for car repairs, for purchasing my next car, for house repairs and renovations, for charity, and for "long-term fun" (vacations and expensive toys like computers). Over the last year, that number has gone from -$352 to -$4169.
I guess a little discussion of negative numbers is in order here. Even with that big of a negative number, I still have plenty of savings to cover problems so long as they don't all happen at once. So basically, I have borrowed the money from my new car fund and 1/3 of the money from my housing fix-up fund for other purposes. Last year it was to lend money to the unemployed. This year it was to buy an additional year of service (which is part of what I wanted this money for). Having enough savings to borrow from yourself is a wonderful thing.
If you add the amount I spent on buying that year of service, that second figure changes to +2216 for a total increase over the year of $2568. At first I was thinking that wasn't so great, but it's significantly more than the original maximum contributions to IRAs use to be, so I guess that's a good start. (I will feel a lot better when that number gets positive again, though.)
So, my net worth snapshot looks pretty good. My long-term financial health seems like it's doing pretty well, too. There's one final thing. Because if you're saving too much money, you might not be having enough fun now. Let's measure the fun I've had over the past year.
Things I've spent lots of money on include a trip to London last November, a new laptop computer this summer, and a totally cool new oven. Other fun things I've done is go to parties of my friends, read more fiction than I've read in a long time, watch lots and lots of movies, learn to crochet, become a daily blogger, and decide to write a novel. I wish I were doing more exercise, practicing musical instruments more, cooking more, and having more parties, but those are more about not having enough time than not having enough money.
Edited to add that I read that millionares save 20% of their income. I decided to use that figure plus 10% interest/capital gains to calculate a goal (instead of the 15% figure above), wondering what would happen. It turns out that my net worth for this month is 4% above that goal. Also, I just surpassed that goal this year when the new housing assessments came out. Woo hoo! I am just like a millionaire. Or a small portion of one. Or a youngish future one. Except for the part where I'm going to retire too young.