Do you keep track of your net worth? Your net worth is simply your assets minus your liabilities. It is a great way to measure your financial progress from year to year. Ideally, your net worth should increase every year, but real life rarely works out that way. There will be setbacks and your net worth will decrease once in a while; however, the general trend should be positive as you get older. If you’re not making positive progress over time, then you probably need to change your lifestyle.
Keeping track of your net worth is especially important if your goal is financial independence and/or early retirement. That’s one way to find out if you’ve achieved your goal. Once your net worth is more than 25x your annual expense, you are financially independent! Well, you might need to add some margin if you retire very early, but 25x is a great accomplishment for anybody.
Net Worth History
I’ve kept track of our net worth since 2006 and it’s great to know how far we’ve come financially. I haven’t examined our net worth in detail for a few years, though. So today, I’ll go over the components that are in our net worth. I will do this with percentages because I’m not ready to share the dollar value yet. I usually do that after the end of the year. You could take a look at our 2015 net worth update if you’re curious. You can also check out the net worth of 240+ personal finance bloggers at Rockstar Finance and see how much your favorite bloggers are worth.
Okay, here is the breakdown of the RB40 household net worth.
RB40 Household Net Worth
Taxable Accounts: 14%
These are the investment accounts that we could access most easily. Our dividend portfolio is the biggest part of these taxable accounts. We have a little money in P2P lending and crowd funding, but it’s very small compare to our dividend portfolio.
The taxable accounts are especially important if you plan to retire early. You need to fund your retirement somehow and these accounts are more accessible than the tax advantaged accounts. This portion of our net worth will help generate passive income to fund our early retirement.
Tax Deferred Accounts: 38%
These are our traditional IRAs and 401k accounts. I’ve been maxing out my 401k contribution for almost 20 years and it is doing quite well. All the money here is invested in low cost Vanguard stock and bond funds. After Mrs. RB40 retires, we will slowly roll the money over to our Roth IRAs. Building a Roth IRA ladder is a great way to minimize tax when you retire early.
Tax Free Accounts: 8%
Our Roth IRAs aren’t a big part of our net worth right now. We contribute the max every year, but the low contribution limits mean we can’t accumulate much in our Roth IRAs. This portion of our net worth should grow once we start building our Roth IRA ladder.
Rental Properties: 22%
Our rental properties have gained quite a bit of value over the last few years. It’s hard to value the rentals properly, though. When we sell, we will have to pay a ton of taxes and depreciation recapture. Also, we don’t know how much we could really sell the rentals for. The estimate from Zillow seems really high to me. The house next door to our small duplex recently sold for $1.05 million and Zillow values it at $1.25 million. It seems like they overvalued it a little bit.
Anyway, I will value our rentals at 75% of what Zillow shows us. That should be in the ball park after paying taxes, depreciation recapture, commission, escrow fees, etc…
Primary residence: 5%
The biggest piece of most family’s net worth is their home. However, I don’t think that’s the right way to go. All that money is stuck in your home and you’ll have to pay property tax, insurance, repair and maintenance every year. I think it’s better to live in a modest home and make the money work harder. That’s why I’m glad our primary residence is just 5% of our net worth. Building equity is nice, but I like investing better.
I use 90% of the value Zillow gives us because we don’t have to pay a lot of taxes when we sell.
529 plan: 2%
RB40Jr’s college fund.
This is almost a year’s worth of annual expenses for us. I usually keep less than 3 months worth of expenses in our checking and saving accounts, but we’ve been hoarding cash in case we see a stock market correction.
I have a very small pension from my former employer. The 2015 statement showed I’ll receive $350 per month starting in 2039. It’s better than nothing, but I wonder what I could buy with $350 in 23 years? Would it be enough to fill up a tank of gas?
Previously, I didn’t include my online business in our net worth so this will give it a boost in our monthly cash flow updates. I value Retire by 40 at 3x annual business income. I don’t plan to sell, but it’s good to put some value to it and include it in our net worth.
Other assets: 4%
This one includes my condo in Thailand, our car, musical instruments, and some artwork. The big piece of this is the condo. My dad lives there and he rents it out occasionally. This condo would be a great home base for us when we relocate to Asia for a few years. I plan to live here and travel all around the region once RB40Jr is off to college. That’s a long way off, though. He just started kindergarten last week…
That’s about it. The only thing missing from here is Social Security benefits. That’s a long way off, though. I might not even be around to collect. I also didn’t count our other personal properties. They aren’t worth much and they are depreciating every day. There is no point including things like a computer, sofa, and TV.
Here is another way to slice and dice our net worth – by asset classes.
Almost half of our net worth is invested in stocks. When the stock market crashes, our net worth will suffer, too. That’s okay, though. It will be an opportunity to buy more dividend stocks and increase our passive income. I’m actually looking forward to a big correction. We have some bonds to help balance things out so I’m sure we could ride through the next bear market.
The next big chunk is real estate. Real estate has been great for a few years. I have never seen such a construction boom in Portland. It seems like there are several big construction projects in every neighborhood. I wonder how long this can last.
Should I lump REIT with real estate? It’s kind of in between stocks and real estate. Eventually, I would like to move most of our real estate investment into REIT. Owning rentals can be a lot of work. When we get older, we want to relax and not worry about our local rentals.
The best growth opportunity here is probably the intellectual property. I need to keep putting more sweat equity into Retire by 40 and grow the brand. Maybe I should take a year off to write a book. It’s tough to work hard when you’re retired, though.
The other pieces are just for completeness’ sake.
How I track our net worth?
I track our net worth with an Excel spreadsheet. It is a good exercise to go through your finance at least once a month and see how all your investments are doing. I also use Personal Capital to get a quick snap shot, but I think it’s best to make your own spreadsheet. That way, you have all the history you care to save.
That’s what our net worth looks like in 2016. Stocks and real estate have done very well over the past few years and our net worth benefits from the growth. It will be interesting to see how things go the next few years. We are long overdue for a major stock market correction. The housing market also seems to be slowing down in California. That usually means Portland will follow in a year or so. We might have a much different picture next year. It might be a good idea to diversify a little more, but I’m not sure how. Maybe put some money in precious metals and commodities? Or just hold more cash? I don’t like either of those options, though.
How does your net worth look? Do you think we have diversified enough?
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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