Free Money Finance

How to Get Really, Really Rich

Here's a piece on how to get really, really rich. The short version? Start your own business. Of course there's more to it than that, but starting your own business is the main advice this article gives.

Overall, I think I have to agree with this piece. If you want to get really, really rich (tens of millions of dollars worth), there are only a few ways to do it and most of them are unlikely to happen to most of us (inheritance, lottery winner, etc.) But having a business is something all of us at least have a chance of doing, so unless I'm missing something (you tell me), then it's the most likely way for most people to become really, really rich. That's not to imply it's easy, just that it's more likely than inheriting $50 million or winning the Super Lotto.

Then again, does anyone need to be really, really rich? If you simply apply the principles I discuss here at Free Money Finance (summarized in my post on three steps to becoming rich), you can become wealthy enough to live a pretty comfortable life -- and without the "sacrifice your family, friends, and health" that so often comes with giving your all to a business. No, I'm not there yet myself, but I'm well on the way, and I hope to take as many of you with me as I can. :-)

It Could Be Worse

Updated my net worth last night for the month ending October 1. Ouch. It was a bad, bad month. I'll give details during my quarterly update near the beginning of the year.

But, I didn't lose as much money as these guys. Here's a list of the biggest losers in the recent market downturn and how much they lost:

• Warren Buffett -- $13.6 billion
• Oracle founder and CEO Larry Ellison -- $6.2 billion
• Microsoft's Steve Ballmer -- $5.1 billion
• Amazon.com's Jeff Bezos -- $3.6 billion
• News Corp.'s Rupert Murdoch -- $4 billion

Then again, these guys still have BILLIONS, so it's all relative, huh?

BTW, the biggest loser in percentage terms was Murdoch. He lost $4 billion and has "only" $3 billion left. That's a big hit!

July-September Net Worth Review: Painful!

Last year I gave monthly updates of my net worth. That was a bit much since nothing really changed month-to-month, so this year I'll be updating my progress once a quarter. This post is about what happened in July through September this year.

No news to anyone reading this blog, but the market was down again this quarter (down 9.42% to be exact) and is down for the year. My net worth took a big hit -- down 5.56% for September alone. Yikes!

I was protected from an entire freefall a bit because a good portion of my net worth was in cash that I'd saved for a downpayment on our new house. Furthermore, we continued to invest/save for the three months, so our net worth benefitted from the extra amounts socked away. Still, as the market goes, so goes our net worth. And as we all know, the market went south BIG TIME the past few months.

Of course I continued to buy and invest throughout the quarter (most of my investing is automated), knowing that my long-term view (20 years) would end up giving me good, solid gains if history was any indication of the future. Still, it was painful to look at my net worth drop as I updated my investment information into Quicken.

Unless a miracle occurs, this will be the first year that my net worth has been down in the 15+ years I've been tracking it. I'm at the point where my (relatively high) savings rate can not overcome drops in the market because the amount of my investments are simply too big. I save a good amount each year, but when the market drops 20.66% in nine months, there's no way I can overcome that.

I'm not really doing anything different other than making sure my emergency fund is a bit larger (we're cutting out unneeded expenses). We'll keep saving and investing, knowing that the market will eventually turn around (even if "eventually" is 10 years from now.)

Note: I originally wrote this piece in early October and had to keep moving it back due to other posts coming up. Now that October's market results have been even more brutal than September's, I'm afraid to look at my net worth at the end of this month. ;-)

Do You Track Your Net Worth?

JD at Get Rich Slowly says that he doesn't track his net worth. He details his reasons why and acknowledges than many people think net worth is the most important financial measure.

I'm one of those people that thinks net worth is the single-most important financial measure. It's how I "keep score" with my finances -- I use it to determine whether or not I'm making progress. Sure, I look at a ton of other numbers (Quicken makes that easy), but net worth is the main figure I track.

That said, I don't obsess about it. I used to look at my net worth number a couple times every week. It went up or down (sometimes in big jumps) as the market went up or down. But that was too much for me. Currently, I look at my net worth once a month and that seems just fine to me.

So, here are a few net worth related questions I have for you:

• Do you track your net worth?
• Why or why not?
• If you do track it, how often do you look at your number?

I'm sure the comments on this one will be quite interesting. :-)

I'm About to Look

In Kiplinger's six things to do while the world ends, they list the following as #1:

First, do anything, but do not look at your investment-account balances. What you see would just upset you. Take a long walk instead. The thing is, now is not the time to lose your cool completely and sell assets that you thought were good investments a week ago. They undoubtedly still are good investments.

Unfortunately, I update my net worth at the beginning of every month, so I have to look. I'll probably review the numbers this weekend. Please pray for my sanity... ;-)

Palin's and Biden's Finances

Here's more perspective to add to our conversation about the candidates finances we started the other day.

This article details the personal finances of VP candidates Sarah Palin and Joe Biden. Here are a few of the highlights from the piece as well as my thoughts on them:

Palin, the Alaska governor whose selection by John McCain for the Republican ticket has riveted both sides of the political aisle, would be the poorest vice president in recent memory. Biden, Barack Obama's almost-taken-for-granted running mate, would be as well.

In a political world usually divided between the rich and superrich, the Palins and Bidens are decidedly middle class. And their investments are on the same scale as yours and mine.

Interesting. It's not a bad thing to have someone closer to the "masses" in net worth in the White House, huh? But are they really on the same scale as the rest of us? Read on.

Not counting their homes, which are exempt from reporting requirements, the VP candidates would struggle to find $1 million between them. Their retirement nest eggs -- which for both candidates are almost their entire net worth -- are modest in the extreme, amounting to somewhere between $300,000 and $400,000 for each family.

They are also, on the liberal-conservative scale, upside down. Democrat Biden has most of his money in a tax-sheltered annuity, that most timid of investment vehicles. The Republican Palins (husband Todd is the investor) are much bolder, venturing into individual stocks and exotic exchange-traded funds, or ETFs.

Isn't there something missing here -- like their ages? Palin is waaaaaaay younger than Biden, so her net worth is actually pretty good (compare it to what most 40-year-olds have.) Biden on the other hand is much later in life, so his net worth is comparably lower given this.

And as for how they invest, this seems also to be dictated by their ages -- one younger and more aggressive and the other older and more conservative.

Seems like the writer of this piece should have considered the ages of the candidates -- seems like a pretty meaningful (and obvious) issue impacting their finances.

[Palin] earns $125,000 a year as governor, and Todd Palin earns almost exactly as much from seasonal jobs, including salmon fishing, oil-rig maintenance and his championship snowmobiling in Alaska's annual Iron Dog race.

In addition to owning their home, the Palins are co-owners, along with friends, of two vacation properties identified not by street number or town name but by tract number from the state's land survey. They have a mortgage on their home but no other debt.

Hardly middle class -- at least from an income standpoint. They make $250k per year combined. But what do they do with their money -- they only have $300k-$400k in assets? My guess is that they give much of it away. [Update: See my comment below. After a reader comment and re-reading this sentence, it sounds as if I think the Palins are giving away a large percentage of their incomes. I do not think this. I do think that they are likely to give an amount much larger than average -- in the 10%+ range of their annual incomes. Sorry for the confusion -- sometimes I write faster than I think. ;-) ] After all, Palin comes from a Christian denomination known for its giving. Also interesting is that they have no debt other than their mortgage. Good for them.

In 2007, the period covered by the latest financial disclosures, Biden earned a little less than $300,000 from the Senate ($165,200), part-time teaching jobs and a book advance. His income and portfolio reflect his ranking as one of the poorest senators.

He is encumbered by several loans, including one dating to 1989 that was used for a son's college expenses. It was valued between $15,001 and $50,000 at the end of 2007. Unlike Palin's filing, which under Alaska rules can be detailed down to the penny, Biden's is on a federal form that organizes finances into broad ranges, such as $100,001 to $250,000.

Again, hardly middle class on the income side. He makes the big bucks but has little net worth to show for it relatively speaking (his annual income is the same as his net worth -- a sign of a poor saver.) And he's got a bunch of debt. Yikes!

It's hard to tell where these two would rank historically in terms of vice-presidential wealth, but they're certainly in the same rut as Walter Mondale. While running with Jimmy Carter in 1976, he revealed a net worth of $77,000 and joked he wanted the job "because I need the money."

Yikes! I never knew this.

From a class point of view, virtually all of the families in my neighborhood are very much like the Palins and Bidens, living modestly but well on incomes in the low six figures.

I wouldn't call them "average" (as the writer implies). They may live modestly compared to how they could live, but let's face it, they're still well up there on the income scale. I guess he's trying to make the story that their finances are just like those for most of us commoners. I don't think most people make $250k-$300k and I'm not buying the "same as us" thinking.

April-June Net Worth Review

Last year I gave monthly updates of my net worth. That was a bit much since nothing really changed month-to-month, so this year I'll be updating my progress once a quarter. Here's what happened in April through June this year.

The market was down again this quarter and is down for the year. What made this quarter unusually cruel was that the market went up dramatically (on May 19 it peaked -- up 7.86% since the end of March) before starting its mid-May through June free fall. So we end up a bit below the close last quarter after quite a roller coaster ride. Here are this year's stats for the S&P 500:

• Down -11.55% since the start of the year
• Down 3.23% since the end of March (date of my last update)
• Down 8.60% for the month of June

One downside to having a good deal of assets in the market is that when the market goes down, so do my investments. My net worth is down -3.92% for the year so far. I'm doing better than the market for two reasons:

• I kept on making contributions to my 401k as well as my taxable accounts. In other words, my current savings is off-setting some of the investment losses.

• A good portion of my net worth is in my house (which is already fully depreciated in my records) and cash that I'm saving up for a downpayment on our new house (if we ever find one). So in a declining market, these two factors actually protect my net worth from the drops my stocks are taking.

A few more notes for this month:

• I continued to buy and invest throughout the quarter (most of my investing is automated), knowing that my long-term view (20-25 years) would end up giving me good, solid gains if history was any indication of the future.

• My quest to make more money with my two-credit-card strategy is doing "ok". I have about the same amount of charges this year as last and the same level of rewards as well ($130 to date), though last year I used the Blue Cash from American Express card alone and this year I'm using both it and the Chase Freedom Cash Visa Card. I have reached the second tier now on the Amex card, so things should start to ramp up quickly from here on out.

• I'm not sure what to expect from the market for the rest of the year. Oil seems to be jerking the market to and fro and with an election coming up, it's anyone's guess what will happen. I'm planning to keep on investing as much as I can and waiting for the market to turn -- which it will, it just may take a lot longer than any of us are hoping for.

Net Worths Down

Americans lost $1.7 trillion in net worth in the first quarter of the year:

Americans saw their net worth decline by $1.7 trillion in the first quarter - the biggest drop since 2002 - as declines in home values and the stock market ravaged their holdings.

So I'm feeling better about my net worth now. ;-)

How Does the Economic Future Look to You?

Here's a CNN article on a middle class family that is having a tough time financially given the current economic environment. I certainly understand how many families are facing this sort of pressure -- gas prices are sky-high, food prices are high, housing is in the toilet, there's a war on, Wall Street is so-so, there is uncertainty about the upcoming election, and so on and so on. Not a lot of good news out there.

Seems like all of this is adding up to some pretty pessimistic views about the future. This paragraph in particular stood out to me:

Just one in five households surveyed expect their finances to improve during the next year, the least favorable in half a century. Three-quarters of those surveyed said they expected the nation's economic troubles to continue over the next year, the highest level since 1980. They predict the unemployment rate will jump by one percentage point to 6.0% by year end.

I found this interesting because while I too am being hit by the forces noted above, I do expect my finances (as defined by my net worth) to improve over the next year. Why? Because even with the higher prices, I live well enough below my income that I'll still be able to save a considerable amount of money this year. Of course, the stock market could crash completely and that would more than negate any savings I could do as far as my net worth is concerned, but I think the market will remain somewhat flat, so that shouldn't be an issue. (Then again, what do I know about predicting the market?)

How about you? Do you think your finances will be better or worse one year from now?

How to Get Rich

Here's a summary of chapter 11 from 50 Prosperity Classics: Attract It, Create It, Manage It, Share It (50 Classics). This chapter is written by Felix Dennis, author of How to Get Rich.

Key Quote

"After a lifetime of making money and observing better men and women than I fall by the wayside, I am convinced that fear of failing in the eyes of the world is the single biggest impediment to amassing wealth. Trust me on this. If you shy away for any reason whatever, then the way is blocked. The gate is shut -- and will remain shut."

Summary of the Chapter

Be willing to fail in public, and you have jumped the hurdle holding most people back from getting rich.

My Thoughts on This Subject

1. Fear keeps people from doing a lot of things. I'm not sure it keeps them from getting rich, but this guy sure seems to think it does -- and he seems to be doing better than I am. ;-)

2. There's another path to wealth that takes longer, but is much more certain to happen (versus getting rich through a business pursuit.)

My Finances 10 Years Ago and Now

The Money Blog Network members are participating in a group writing project called "Then and Now." The idea is to compare our personal finances today with how they were ten years ago. Of course, the idea is to show what progress we have or haven't made in the last decade. Here's what's happened to me.

As most of you know, I track everything by looking at my net worth. I feel that it encapsulates how I've done financially -- how I've saved, how I've grown my career, salary, and side businesses, how I've invested, etc. -- all in one number. That said, here's what I can tell you about my net worth over the past 10 years:

• In the past 10 years, my net worth has gone up 340%. For those of you wondering, that's an average compounded rate of 17.9%. This includes both savings from my income (of course) as well as growth of assets that I've invested in during those years.

• 10 years ago, I owned my house outright, and it was 66 percent of my total net worth. I still own my house completely, but it's less than 15% of my net worth.

Yes, it's been a good 10 years. I'm REALLY looking forward to the next 10 years. ;-)

So how did I make so much progress in a decade? All it took was three easy steps.

Here are some more posts from other MBN members on the same topic:

• Looking Back: 10 Years Ago

• MBN Group Writing Project: My finances ten years back

• Money Management Lessons: Not Quite 10 Years to Life

• Now and Then: How My Current Financial Situation Compares with a Decade Ago

• Stepping Back in Time: Our Life Ten Years Ago

• Then & Now: What Our Finances Looked Like 10 Years Ago Compared to Now

• Looking Back: The Difference 9 Years Makes

Anyone Loving the Market in April?

Just updated my net worth last night as I do every month and boy was April a GREAT month! I knew the market had done well, but I generally do not follow it closely day by day (otherwise it would drive me crazy), so I didn't know it had done so well. My current net worth is now only down about 2% for the year after being down almost 5% at the end of March.

I'll do a complete update at the end of the quarter (end of June), but just wanted to say "yea!" for at least one good market month out of the past several.

January-March Net Worth Review

Last year I gave monthly updates of my net worth. That was a bit much since nothing really changed month-to-month, so this year I'll be updating my progress once a quarter. Here's what happened in January through March this year:

• The market was down bigtime this quarter as the S&P 500 fell -9.90%. Ouch! I continued to buy and invest all the way down (most of my investing is automated, plus I put in some extra buys), knowing that my long-term view (20-25 years) would end up giving me good, solid gains if history was any indication of the future.

• In addition to the hit from the market, I took $15k of equity out of my home. As I've said before, we may want to be creative with our home if and when we sell it, so I want the net worth in my calculations to be low. That way, I have the most flexibility possible without taking a huge net worth hit (though I'm taking it now bit by bit.)

• Given these two major negative impacts, you'd think I would be in the dog house financially. Well, it wasn't pretty for my net worth, but it was much better than expected. For the quarter, my net worth was down -4.58%. At this rate, I'm on track to be down 18.31% for the year. But if this rate continues, things will have to get very, very bad indeed. I'm guessing that I'll still be up this year, but probably only in the single digits.

So how did I do so well given the market's plunges and the loss of home equity? Savings. I have managed my career to produce a decent income and we've set our lifestyle at a fairly low level. Hence, we spend a lot less than we earn. As such, we have a good monthly surplus and we've continued saving and investing these past three months -- my 401k is fully funded, the kids' 529's got a donation, we fully contributed to the Coverdells we have, and we saved/invested in taxable accounts. We couldn't generate enough to fully cover the market hit, but we did fairly well given the circumstances.

By the way, all of these savings weren't generated by just my income. I have some side business pursuits that contributed a good amount, plus I had a few miscellaneous contributions from things like my credit card rewards strategy -- where I earned several hundred dollars using the Blue Cash from American Express card and the Chase Freedom Cash Visa Card.

I'm looking forward to better months from the market for the rest of this year and am hoping that all of the low-priced investments I've made over the next several months will pay off handsomely by the end of the year. But if they don't, I'll still keep investing as I'm in it for the long run. Eventually, the market WILL turn and, boy, will those be happy days! ;-)

Should I Include Known Liabilities in My Net Worth?

Here's a question I recently thought about and would like your feedback: should I include known liabilities in my net worth? Stick with me for a minute and I'll explain what I mean.

Currently, my net worth is a simple calculation of assets minus liabilities. However, in this calculation I have the following assets included:

• Coverdell accounts for my kids
• 529s for my kids
• Amounts for each kid's future wedding costs (saved and invested in an account I control)

Here's the rub: the assets for each of these are included in our net worth, but the future liabilities (the cost of college as well as the wedding costs) are NOT included. This effectively overstates my net worth.

So, I have a few options:

• Ignore the liabilities and just count the assets (after all, maybe the expenses won't occur for some reason -- who can read the future) -- This is what we currently do and, in my view, it's a true reflection of net worth (assets - liabilities.) That said, this means our net worth will take a big hit as our kids enter college.

• Put in some plug figure for the cost of college and the weddings liabilities -- This would offset the amounts in the associated accounts and reflect my (probable) future liabilities, giving me a "true" running net worth.

• Don't count the assets in my net worth calculation -- This is my least favorite option, mainly because it will be a bit more difficult to track my net worth (extra steps requiring me to subtract the value of these accounts.)

I haven't decided what to do yet -- I wanted to hear from all of you first. What's your suggestion for how to handle this?

How to Be Wealthy While Young!

The following is a guest post written by Paul Damazo, author of 80 Proven Ways to Become a Millionaire, All you need is two or three! He says that by following this advice you can be worth $10 million in 20 years from your wedding day. 

Before you become engaged, decide together to become financially free.

These are the easiest ways to become a multimillionaire! There is power when money makes money! Compounding is earning interest on the principal and the accumulating interest. 

Reduce the Cost of Your Wedding

Forty-five billion dollars was spent on weddings in 2004. In the United States, the average cost of a wedding on the east and west coasts is $38,000; the national average is $26,000. The bridal gown and reception generally are the most expensive items. 

After receiving my masters, my first job was the director of a college food service. During those four years, my associates and I became well-known for the gorgeous wedding receptions we would create. From all my experience, you can have an eloquent wedding for thousands less than the national average. 

If you and your fiancé have the goal to be financially free, spend less and still have an awesome wedding. Be creative! Purchase the book A Simply Beautiful Wedding by Eileen Silva Kindig. It shows how to have a magnificent wedding for much less so that you will have a sizeable nest egg to start or continue with your investment program. If you save $15,000 on your wedding and invest it, in just 30 years you would have almost $1 million! Leave it alone and in 10 more years you would have over $4 million! 

Reduce Your Taxes Legally  

Another major way to become a millionaire is to reduce your income tax and invest the tax savings yourself. The average household spends $18,750 in taxes per year. Reduce them in half and invest the $9,375.

First invest in your 401(k) and other pension plans. Then start a home business, even if it's part-time, as it will allow you to take advantage of many tax savings. 

For 25 years, I owned several farms in Vermont while I lived and worked in California. Those farms gave me excellent income-tax deductions, making it possible to legally reduce my income taxes. Instead of paying unnecessary income tax, I invested that money. Yes, and I still paid my fair share of taxes. Did you know there are 72 different taxes in a loaf of bread?    

Eliminate Paying Interest

When you pay interest on loans and credit cards others become millionaires instead of yourself. The only interest you should ever pay for is for investments-period! It is tax deductible and will save you money, so you will have more to invest. For everything else, pay cash. 

Before my dear, beautiful girlfriend and I were married, we agreed to pay interest only on money for investments. Now decades later, no interest was ever paid. You can choose to do the same whether married or not. 

The average household spends (actually wastes) $10,875 interest per year on 14.2 credit cards and loans. Keep this money and invest it for yourself. In 20 years the total invested is only $217,500 and you will have over $1 million. Continue for another 10 years and you will have over $5 million with only $326,250 invested. WOW, the power of compounding interest!   

Invest Second Salary

I strongly recommend waiting six years before having children. By doing so, both husband and wife can work full-time. Choose to live on one salary and invest the entire other salary. In six years you will have $261,737 and a couple of choices.   

You could choose to have a perpetual income of $39,261 created from the interest and dividends so you can stay home and raise your own children. What a blessing that would be for your family-and the nation!

Another choice would be to keep the interest invested and compounding and in 14 short years (20 years total), your investment from six year's salary would be worth $1.8 million. Now that's exciting!

401(k) Investment Program

The value of a 401(k) investment program is so awesome, that when you and your spouse graduate from college, I urge you to consider the following:

• Select the best job which has the best 401(k) plan and contribute 100% to your plan. Remember, 80% of all companies offer a 401(k) plan and 50% of those will contribute to your plan-free money for you.

• Live as close to your job as possible in order to reduce your commute time, automobile expenses, and the wear and tear on yourself.  Choose to be rested and to spend lots of quality time together, rather than in commuter traffic. 

Let me blow your mind! You can have $1,889,888 in 20 years with a yearly cost of only $5,700. "How's that possible?" 

First, assume you fully contribute to a 401(k) for 20 years. Remember, you are not out-of-pocket the full $15,000. Your employer contributes $5,000 per year. And, if you are in the 43% federal and state income tax bracket, the government reduces your taxes by $4,300 a year. So, instead of $15,000, you are only out of pocket $5,700 per year.   

Just think, as a payroll deduction each paycheck, in 20 years you will have invested out-of-pocket only $114,000 ($5,700 per year) while the investment increased to $1,889,888 ($15,000 invested per year).

And when you are married, each of you can contribute $15,000 per year to a 401(k) so you can double the investment returns shown.

Free Money-Invest Semi-Monthly versus Annually 

Another gigantic aspect of the miracle of compound interest is the free money you can make if you invest semimonthly or monthly instead of yearly.

For example - invest your payroll deduction ($625 semimonthly)/20 years and you will have $1,889,888. Invest $15,000 once per year/20 years and you will have $1,767,152. The difference is added investment income-$122,736. Look at what consistent investing means to your wealth creation and financial freedom. Take $122,736 and divide by 20 (number of years). This gives you $6,136 extra, free money per year invested! 

This is the power of money making money! Compounding is earning interest on the principal and the accumulating interest. 

Remember that Wealth is a Matter of Choice-Yours Alone. Choose today to become a millionaire, to focus on your wealth creation, to create a life you love for you and your loved ones. 

NOTE: This article is designed to inspire you into action and to provide accurate and authoritative information in regard to the subject matter covered. Factual material has been obtained from sources believed to be reliable, and is not guaranteed. All examples are for illustrative purposes only and are not to be construed as recommendations, advice, or tax counsel. The author is not engaged in rendering legal, accounting, or other professional service. If legal or other expert assistance is required, the author strongly recommends that the reader should contact his own professional advisors.  Past performance should not be taken as being representative of future results. Anything tax-related should be discussed with your accountant before it is used for tax purposes. All information provided in this article is for informational purposes only.

The 7 Habits of Wealth

Smart Spending has a piece listing their 7 habits of wealth as follows:

• Hard work
• Modest living
• Patience
• Perseverance
• Balance
• Self-awareness
• Learning

I think this is a pretty good list overall. My take on each of these:

1. Of course -- goes without saying. You'll have to work hard at school/work/your business if you have any chance of making a decent income.

2. Spending less than you earn is my best piece of financial advice. Modest living is a key to this for most people.

3. Having patience over a long period of time is the key to letting the power of compounding work for you.

4. Could also be called discipline.

5. I think it is important to have balance in personal finances (and in life for that matter). Too much emphasis in one area or another can often derail a person's finances. Examples: Get-rich-quick schemes, people who only save, save, save, and won't spend a penny that's "not necessary," "sure thing" stock tips. 

6. Ok, this one's a bit of fluff to me, but I'll give them a pass on it since the rest of the list is good.

7. Of course! In fact, this is one reason I started Free Money Finance -- to encourage people to learn more about their personal finances and help them do so.

So what's your take on this list? Anything here that shouldn't be? Or did they leave out something important?

What Worries Wealthy People

The Street has an article on what worries wealthy people. They cite a couple surveys that found wealthy people have the following worries:

• 42% of those polled were concerned about the safety of their financial assets, including, stocks, bonds, and real estate other than their primary home.

• 53% are concerned about identity theft

• About 15% are worried that their reputation or that of a family member will be damaged on online message boards, chat rooms or social networking sites.

• Around half of all people who took part in the 2007 Annual Survey of Affluence and wealth in America indicated concerns about someday running out of money and their financial security.

A couple thoughts:

1. For all of those out there with meager net worths, don't think your worries will disappear when you become wealthy. They just shift around a bit.

2. That said, I'm sure most people who aren't wealthy would trade these concerns for their present-day ones. ;-)

Net Worth Review: 2007 Year End

In 2007 I gave a monthly update of my net worth. Here's the last report for the year which is a summary of how my net worth fared in 2007. First of all, my overall results:

• The S&P 500 ended 2007 up 5.49% including dividends. I realize this isn't a perfect comparison for gauging the growth of my net worth, but it's the best one I can think of and no one has yet suggested a better alternative.

• My net worth is was up 13.29% in 2007. It was my fourth worst year since I started tracking my net worth in 1996. This result brings the compound annual growth rate of my net worth since 1996 down to 16.36%.

Now for some specifics:

• The investment portion of my net worth (the portion that should be measured against the S&P 500) was up 5.07%. I underperformed the market for two reasons: 1) I had some individual stocks that performed poorly and 2) I have a good amount in cash (saving up for a downpayment on our new house, if and when we buy it) that earned just around 5%. My other investments were right at the market's level of performance.

• I took the value of my house down in Quicken by 25% (below market value) and these numbers are included in the net worth numbers. For details on why I did this, see What I Might Do with My Old House When I Buy a New House.

• Of the gains to my net worth, about two-thirds can be attributed to additional saving. I had a stellar income year and kept my expenses low, thus I was able to sock away a good amount of money. Much of this money went into the market and hopefully I'll be sitting pretty when the market rebounds (though that rebound my be some time off yet.)

As for 2008, here's what I'm planning:

• Keep saving/investing. I'll keep adding to my 401k as well as my taxable investment accounts (and praying for a market surge.)

• Keep decreasing the value of my current home. There's still a good amount left that I want to take out in case we decide on one of the more generous options when we get rid of our current home.

• Quarterly posting on my net worth. I don't think monthly posts show much change from one to another, so I'll update my net worth here monthly in 2008.

And one final thought: if I can keep my net worth growing by 10% per year for the next 8-10 years, I'll be able to retire (at least in part, if not completely.) Of course, if I grow it by more than that each year, I'll be able to retire or semi-retire earlier.

A Rich Person’s Definition of Rich

The WSJ has an interesting article on a rich person’s definition of rich. The bottom line:

Many wealthy people think that being "rich" is the next economic level above their current level.

The Journal's post actually gives some specifics on what people with over $500k in investible assets view to be rich, but they also note the "next economic level" issue I list above:

Previous studies have shown that when people are asked how much it takes to be rich, they always give a number that’s twice their current net worth or income. Those with $100,000 in incomes say $200,000, while those worth $5 million say $10 million.

All of these studies show that when it comes to defining rich, Americans of all income levels always look up, rather than down.

I always get a kick out of reading stuff like this. On the low end, people who think $200,000 is rich seem out of their minds and on the high end people who don't think $5 million is rich seem out of their minds. Maybe we're all just crazy!!!! ;-)

For reference, here's a fact that might add some light to the issue of what exactly "rich" is:

A net worth of $1.4 million will put you in the top 5% of Americans, according to the Federal Reserve.

What about you? What sort of net worth and/or investible asset amount do you think it takes to be classified as rich?

How Much Would You Need to Quit Your Job?

Well, the verdict is in and it looks as if most readers would quit their jobs if they won the lottery.  I'm not really surprised by that -- having lots of money opens up completely new doors that allow some pretty cool decisions to be made/considered.

One reader put a spin on my original question and came up with an intriguing question of his own:

Perhaps the better question is what amount (after tax) is your tipping point. I'm 42 and have four girls ages 2-10. Without getting into to the detail, $2.5MM (rounded to the nearest half million).

Good question, huh? I'd follow it up with, "And how close are you to reaching that goal?"

For me, I think I'd need $2.5-$3 million. I'm not going to go into great detail in this section on how close I am to reaching that goal since I'll be covering that issue in my year-end net worth wrap-up. But I will say that I think it's possible for me to significantly downsize (if not quit work completely) in the next 7-10 years (somewhere between age 50 and 53.)

How about you? How much would you need to have to be able to quit your job? And how close are you to reaching that goal?

Median U.S. Incomes and Net Worths

I just stumbled upon this Bankrate piece that lists median U.S. incomes and net worths including the following on incomes:

If you and yours are bringing in $40,000 a year, you're doing better than half the households in America. Or, as a Washington think tank recently pointed out: If you're a teacher married to a policeman, your combined household income puts you in the top 25 percent of all households in the nation.

Anything in six figures means you're in the top 20 percent.

I'm surprised by both of these. I would have thought that the median was higher and that six figures didn't get you so high into the rankings.

But income is really the minor part of the story (in my opinion.) We've all seen examples time and time again of people who make a boatload and spend it or -- or even more!  Net worth is where it's really at -- it's the true measure of what you're worth. Here's how Bankrate lists the median net worths:

• 90 to 100 percentile: $833,600
• 80 to 89.9 percentile: $263,100
• 60 to 79.9 percentile:  $141,500
• 40 to 59.9 percentile: $62,500
• 20 to 39.9 percentile: $37,200
• Less than 20 percentile: $7,900

And it also includes this:

Across all households, the national median net worth is $86,000. Half of your fellow citizens have more than that, half less.

For those of you wondering, yes, this includes home equity.

I guess I never get over the shock at seeing net worth numbers. They're always amazingly low! The median net worth is $86k? Holy cow, that's pathetic! (even for someone making $40k per year)

One final comment: I always have people telling me that $1 million is "not that much" whenever I write about saving to reach $1 million. While it's true that $1 million is not what it used to be (nothing is), it's also not chump change. Having $1 million is puts you in the top few percentages of people in the U.S., so it's more than most people have (including, probably, those people that make the "it's not that much" comments.)

Money Math: The Rule of 72

Money magazine has five short money math tips in its January issue and I'll be sharing/commenting on them over the next few days. Here's one for today:

How many years will it take to double my money?

The math: Divide the number 72 by your annual investment return. If you're making 8%, you'll double your stake in nine years.

I sometimes use my own rule of 70, but as some readers have pointed out, that method leaves a lot to be desired -- especially in later years.

I use the rule of 72 to get a rough guess at my net worth in the future. If I think I can grow it by 8% a year, I know I'll have twice that amount in nine years (when I'm __ age), four times as much as I have now in 18 years (when I'm __ age), and eight times as much as I have now in 18 years (when I'm __ age). It gives me a feeling for how much I'll have at retirement and whether or not I'm on track.

FYI, my net worth has been growing at a bit over 16% for 15 years or so now, so I use 10% and 7 years (my rule of 70) for ease of calculation, knowing I still have plenty of room for error.

Net Worth Review: November 2007

Every month, I give a bit of detail on how my net worth did the prior month. This post will explain how I did in November 2007.

The market was down bigtime this month as the S&P 500 fell -4.40% during November. However, my net worth was up 0.94% for the month (more on why in a minute). My net worth is now up 13.13% so far for 2007 and I'm on track to be up 14.32% for the year. Since the S&P 500 is up only 4.45% for the year, I'm doing fairly well.

I did better than the market due to:

1. I received my annual bonus. Our fiscal year ends in October, our company had a great year, and I got my full bonus in November.

2. The generous owners of our company made a discretionary contribution to everyone's 401k that was a good percentage of our annual salaries.

3. I had a bit of side income come in.

In other words, the market tanked and took my net worth with it. But I had enough extra/additional income to more than make up for this.

A few other notes:

• I continued to take the value of my house down in Quicken (so it more accurately reflects the home's true worth.) I'm planning on doing this over the next several months and will actually take it far below the sale value (which it probably is now anyway) just to give me a safe cushion in reporting my net worth.

• My quest to make over $500 on my Blue Cash from American Express card this year continues to go well. Through October of this year (the last month reported), I've earned $396.42 on charges of $22,865 while at this time last year I had earned $272.89 on charges of $16,159. Charges are up 42% but earnings are up 45% (and growing rapidly.) So far, I've earned 1.73% cash back on my purchases.

• I received my second Chase Freedom Cash Visa Card (now with $50 bonus offer as of this writing) to make even more next year using my hybrid credit card strategy. I made my initial charge to be sure I locked in my bonus.

Four Steps to Long-Term Financial Success

I recently read The Lies About Money. I wasn't really wild about the book, but it did have a few tidbits that I felt were worthwhile. One was their list of four steps to financial success:

1. Save regularly.
2. Hold your investments for very long periods.
3. Build a highly diversified portfolio.
4. Periodically rebalance that portfolio.

Good stuff, huh? Sound familiar? It's very similar to How to Get Rich in Three Easy Steps.

That's what I love about personal finances -- you don't have to be a rocket scientist to succeed with your money. If you simply do the basics and remained disciplined enough to keep at them for years and years, you will become wealthy.

For more on this line of thinking, see these posts:

• My Best Financial Advice: Spend Less than You Earn

• The 10 Best Money Moves You Can Make

• Poverty to Prosperity

Net Worths of the Presidential Candidates

Just got this month's issue of Kiplinger's Personal Finance and they list the net worths of each of the major presidential candidates. In most cases, they give a range, so I've picked the mid-point of the range when listing the number. Here's the list, and my comments, in countdown mode:

7. Barack Obama $778,000

Though he's worth more than most people in the U.S., this is as close to a "normal guy" financially in this bunch. In fact, he's a downright pauper compared to the rest of the field.

6. Fred Thompson $5.5 Million

Not bad, but I would have thought he would be worth more. After all, isn't this guy a popular actor? In fact, the piece notes he made (in income) between $2.5 million and $16 million from January 2006 to September 2007 from various movie and TV roles. And yet his net worth is only $5.5 million? What did he do -- spend it all?

5. John McCain $26.5 Million

From here on out, these people are very, very wealthy.

4. (tie) Hillary Clinton, John Edwards $30 Million

Edwards has $30 million, while Clinton may have a lot more or a lot less -- her range is $10 to $50 million. My guess is that it's on the upper end of this limit, but that's only a guess.

2. Rudy Giuliani $44 Million

Makes most of it from speeches, books, and consulting. If I were him, I'd let it ride, forget being president, and keep talking for money. :-)

1. Mitt Romney $220 Million

Holy cow, Mitt, you're filthy rich! In fact, you're worth almost as much as twice the net worths of all the other candidates! Are you looking to adopt? If so, I know a money blogger that's available. Can I call you, dad? ;-)

Net Worth Review: October 2007

Every month, I give a bit of detail on how my net worth did the prior month. This post will detail how I did in October 2007.

The market was solid this month as the S&P 500 went up 1.45% during October. My net worth was up 2.14% for the month and is now up 12.07% so far for 2007. I'm on track to be up 14.49% for the year if it keeps going at this rate. For the year, the S&P 500 is up 9.26%, so I'm doing fairly well.

A few comments this month:

• I did better than the market due to: 1) some funds/stocks I held outperformed the market and 2) it was a good saving month as I stocked more away in case we ever buy a new house.

• I continued to take the value of my house down in Quicken (so it more accurately reflects the home's true worth.) I'm planning on doing this over the next several months and will actually take it far below the sale value (unless prices keep dropping) just to give me a safe cushion in reporting my net worth.

• My quest to make over $500 on my Blue Cash from American Express card this year continues to go well. Through September of this year (the last month reported), I've earned $341.05 on charges of $20,152 while at this time last year I had earned $232.47 on charges of $14,315. Charges are up 41% but earnings are up 47% (and growing rapidly.) So far, I've earned 1.69% cash back on my purchases.

• I received my Chase Freedom Cash Visa Card (now with $50 bonus offer as of this writing) to make even more next year using my hybrid credit card strategy. I made some test charges on it this month to determine how places I shop at are classified (this will determine my reward with the card and hence which card I use at each place) and will review the results once I get my first bill.

How Do You Define "Middle Class?"

Here's an interesting question from MSNBC -- how do you define middle class? The article notes that there's no official government definition of "middle class" and, as such, gives a wide range of what could be called middle class as follows:

Based on 2005 Census Bureau reports, some 40 percent of the nearly 115 million households in the U.S. earned less than $36,000 a year. That represented just 12 percent of all income. The 40 percent on the next rung up the economic ladder took in between $36,000 and $91,705 — or about 37.6 percent of all income. The top 20 percent, who made $91,705 or more, collected half of all income.

But those numbers don’t adequately reflect the state of mind of those who consider themselves middle class. Surveys have shown that, while people consider $40,000 a year to be the low end of what it takes to buy a middle-class life, some people who make as much as $200,000 a year still consider themselves middle class, the researchers said.

We all use the term "middle class," but I've never really given any thought to what it meant other than "average." But how big is that average range -- that's the key question? And is income even the right measurement? Wouldn't we be better off using net worth?

How do you all think of/define the middle class?

Your Friends/Neighbors Help Determine Your Financial Health

In church recently my pastor was saying that who you hang out with will determine who you become (and hence you shouldn't hang with the wrong crowd.) To illustrate this point, he told the story of a man who went to a seminar. The leader told him to make a list of his 10 closest friends and beside each one list what he thought they made in salary each year. Then he was to add them up and divide by 10 to get an average. The leader said, "This is your income." And he was right. the man was making exactly the average of his 10 closest friends. The point: who you hang out with is who you become.

I then was sent this piece from Kiplinger's by a reader. I'd read it before and found it interesting, but this time, the following comment on how much your neighbors impact your finances stood out to me:

But the finances of those around you affect more than just the perceived value of your property. They also, like it or not, help shape how much you spend and save and color your perceptions of your own financial well-being.

A few thoughts on these points:

1. Yep, the 10-person test noted above is a bit flawed since it's based on what people THINK others make. They don't know the correct numbers for sure, so maybe their estimates are off due to their perceptions.

2. It's certainly true that those around you do have at least some influence on your finances. You see what they buy, wear, drive, etc. and these influence what you do.

3. That said, it's not like they have total control over you. Just read The Millionaire Next Door. These people somehow live like the middle class but have accumulated much more. How? They've earned decent incomes and lived well below their means despite what their neighbors have done.

4. On our street, I'd say that appearances would put us at or slightly below the average. Why do I say this? Because there are two houses across the street that are about 50% bigger and much more expensive than our place. Almost all the rest are either slightly bigger or the same size. Only one I can think of is smaller. And yet, if you go by the average stats in our area, our net worth well exceeds what our neighbors own.

5. We see our neighbors drive their high-end SUVs, work on their antique cars (two neighbors do this), take expensive vacations, etc., but we're not really moved by these. We know what's important to us and spend accordingly. So they might influence us a bit, but in the grand scheme of things, we totally control our own destiny.

Net Worth Review: September 2007

Every month, I give a bit of detail on how my net worth did the prior month. This post will detail how I did in September 2007.

Woo hoo! What a month for the market! (Or maybe I should say "what a few days for the market.") I go on vacation and the stock market takes off. Good stuff all the way around!

In September 2007, the S&P 500 went up 3.58% during the month. My net worth was up 3.04% for the month and is now up 9.72% so far for 2007. I'm on track to be up 12.97% for the year if it keeps going at this rate. For the year, the S&P 500 is up 7.67%, so I'm doing fairly well.

A few things to add:

• My net worth did worse than the market this month because I continued to take the value of my house down in Quicken (so it more accurately reflects the home's true worth.) I'm doing this through December to even out the drop. So far, I've taken $15,000 off my home's value and I currently have it in Quicken at or below what I could get out of it (after selling costs) if I do decide to sell.

• In addition, I have a good amount in cash now (earning roughly 5%) that will serve as a nice downpayment in case we find a new house we like. Needless to say, it's earning below my average and thus drags down my overall performance.

• My quest to make over $500 on my Blue Cash from American Express card this year continues to go well. Through August of this year (the last month reported), I've earned $289.86 on charges of $18,041 while at this time last year I had earned $170.84 on charges of $11,219. Our vacation to Disney as well as the new road bike I bought this year have accounted for the extra charges and thus the over $100 extra I've earned so far. We'll see if I can keep it up.

BTW, I've applied for the Chase Freedom Cash Visa Card (now with $50 bonus offer as of this writing) to make even more next year using my hybrid credit card strategy.

Net Worth Review: August 2007

Every month, I give a bit of detail on how my net worth did the prior month. This post will detail how I did in August 2007.

What a roller-coaster month in the stock market, huh? In August 2007, the S&P 500 went up 1.43% in the first few days of the month before dropping like a rock and falling -6.05% to the low point in the month. (This was the point where people were heading for the hills, claiming the sky was falling, etc. Instead, I bought more shares in my index fund.) Finally, the market rallied and finished the month up 1.29%. 

My net worth was up 0.84% for the month and is now up 6.48% so far for 2007. I'm on track to be up 9.72% for the year if it keeps going at this rate. For the year, the S&P 500 is up 3.95%, so I'm doing fairly well.

A couple things to add:

• My net worth did worse than the market this month because I continued to take the value of my house down in Quicken (so it more accurately reflects the home's true worth.) I'm doing this over the course of a few months to even out the drop and I'll be done adjusting in a couple more months.

• On the extra shares of index funds I bought during the month (when the market was falling quickly), I made an average return of 3.28%. Not too bad for a 15- to 20-day investment, huh? Of course, we'll see how this money does in the long run -- that's what will really tell if it was a good move or not.

Finally, I have a question for you all. Does anyone out there like these monthly updates? If not, I'll simply skip them as I feel they're not adding a lot of value. Maybe I'm wrong -- you tell me.

Net Worth Review: July 2007 (What Goes Up, Must Come Down)

Every month, I give a bit of detail on how my net worth did the prior month. This post will detail how I did in July 2007.

In July 2007, the S&P 500 was down -3.20% and my net worth was down -2.47% during the same time. After starting what was a record-breaking month, the market dropped like a rock and took me with it.

My net worth is now up only 5.59% so far for 2007 and on track to be up 11.18% for the year if it keeps going at this rate. For the year, the S&P 500 is up 2.63%, so I'm doing more than twice as good as the average -- as if that's any consolation.

A few things to add:

• I decreased the value of my house in Quicken by $5,000 this month and plan to do so for the next couple of months. It may be a conservative estimate of the actual value, but the way things have been going with the housing market, it may NOT be as well.

• I'm accumulating cash in my Vanguard money market account in case we find a house we want to buy. We'll be able to put a good downpayment on the new place without using any equity from the old place. Then we'll need to decide what to do with the old house. Decisions, decisions.

• I'm hoping a year-end bonus will give my net worth a bit of a spark, but you know how that goes -- there's still a long way to go before the end of the year and anything can happen.

• If the market shows any signs of life, I'll be fine. If it flounders, I guess I can take comfort in the fact that I'll be buying investments at lower prices and will reap big gains when the market eventually takes off.

Stocks Still Return 10% a Year

Here's an amusing USA Today piece. It highlights the author's challenges with his readers. He argues that stocks, on average, return 10% a year. But when the markets are down, he gets letters that he's crazy -- it returns no where near 10%. And in this piece, he gets a letter asking if 10% is too low to expect. Why? Because the market had a great year the previous year. Here's his response:

The market, on average, returns 10% a year. I have no idea how much the market will return this year or next year. It's also important to point out it's uncommon for the market to return exactly 10% in any given year. That's a long-term average. For all I know, this year the market may return 20% or it might fall 20%. But if you stay invested in stocks, and own the kinds of stocks that fit your taste for risk, a 10% average annual return isn't an unreasonable assumption.

That's right -- the AVERAGE is 10%. But in a five year period, there will likely be significant swings both above and below this level. But 10% is still a reasonable number to use when estimating how your stock portfolio will perform over the long term. In the short term, it's anyone's guess what your portfolio will do.

Another good thing with 10% is that it's easy to calculate in your head -- much easier than 8% or 12%. ;-)

I look at the performance of my portfolio (of course), but a bigger issue for me is the performance of my net worth. This number factors in not only how my portfolio is doing but also how much I'm able to add to my net worth by saving from current income as well as how my home is increasing in value (or decreasing as it is in the current environment). I've averaged a bit over 16% compounded growth in net worth for the past 15 years or so -- a figure I'm pretty happy with. But, as you can imagine, as my assets get larger, it's harder and harder to maintain that level as I'm trying to grow on a bigger base. That said, I certainly would rather have smaller increases on a large number than large increases on a small number. ;-)

Being Smart Doesn't Mean You Know Squat about Managing Your Money

While reading the August issue of Money magazine, my eye was drawn to a caption that ran beside a picture of a husband, his wife, and their son. It said:

"Two master's degrees between us and we can't balance a checkbook."

I guess this is why intelligence is linked to income but not to net worth. People can be smart and earn a big income, but because they can't even do the simple things when it comes to money (like balance a checkbook), their net worth ends up in the toilet.

But how do people end up this way? Seriously. A fifth-grader can balance a checkbook. And if you have Quicken or something like it, even less of an education is required. How (and why) do people go through their lives with such little financial knowledge? It blows me away.

Net Worth Review: June 2007 (Reality Hits)

Every month, I give a bit of detail on how my net worth did the prior month. This post will detail how I did in June 2007.

In June 2007, the S&P 500 was down -1.81% yet my net worth was down only -0.82% during the same time. Nothing to write home about, but at least I'm better than average. :-)

My net worth is now up 8.27% so far for 2007 and on track to be up 16.53% (which is close to my 10-year average) for the year if it keeps going at this rate. For the year, the S&P 500 is up 5.99%, so by that measure, I'm outpacing the averages by a good amount as well.

A few things to add as updates:

• My net worth will be below the average next month as I gave a big chunk of stock away to a charity. It will take me a few months to make that up financially.

• My results will be a bit below the market in an up market and a bit better than the market in a down market because I'm measuring my net worth versus the S&P 500. And while the S&P 500 fluctuates high and low as stocks move up and down, a good portion of my assets are more stable and change rather slowly. For instance, I have a good cash position now as we save for our future house and, of course, the value of my current home (a decent part of our net worth) doesn't change much. 

• I'm down now to owning only five stocks -- all the rest of my investments are in index funds or mutual funds of some sort. I'm moving more and more out of mutual funds and into index funds, though I'm doing it slowly to minimize taxes. (FYI, here's how I'm doing it.)