Net Worth Review: January 2007

This year I plan to highlight the ups and downs (mostly ups, I hope) of my net worth. While I won't be giving actual numbers, I will give percentages as well as a clear view of what's happening and why.

There are two updates I'm going to be doing in this post: one to summarize 2006 and the other to cover January 2007.

First of all, I need to make a correction. In New Year's Money Resolutions and Net Worth Update, I did not include the year-end dividends and capital gains (which I have reinvested) on my mutual fund investments, and thus my net worth was vastly understated.

In actuality, my net worth was up 19.9% in 2006 which was pretty good. It's hard to argue with a 20% gain. This makes my net worth compounded annual growth rate 16.64% since I stated tracking it in January 1996. Again, not bad at all.

But if you dig a bit deeper, it's not all roses. I had a question a couple weeks ago about where my net worth increases came from -- my savings (current income) or the earning-power of my investments -- so I decided to look at the numbers and find out.

Of the net worth increase I saw in 2006, 90.3% came from four accounts -- all four of which are investment accounts. Included in these numbers are both contributions I've made to the accounts as well as the growth and income produced from the investments. When I ran the numbers and separated the two, I found there was a 50/50 split between the two on where the net worth gains came from -- half my gains were because of money I saved/earned (like 401k contributions by my employer and my own, personal savings) this year and half were from my investments growing.

The good news is that my investments are churning off a significant amount of money. The bad news is that my savings/earnings are still contributing a significant amount -- I want to get to the point where they are only 25% or so of my annual gains while my net worth still grows at a good rate. If I had guessed in advance what the split was, I would have guessed 35% for income and 65% for investments. That's now something I need to be working towards.

As for January, the S&P 500 was up 1.43%. My net worth was up only 0.89% during the same time as one of my big stock earners gave a good amount of profit back this month. Oh well, easy come, easy go, huh? ;-)

Comments

[traineeinvestor]

I've found that the proportion of the annual increase in my net worth attributable to returns on investments (as opposed to savings) has generally increased as my net worth has grown. (The last two years were an exception - because my income increased significantly.) It just takes time.

[fivecentnickel.com]

Calculating the proportion of gains from current income vs. investment earnings is a good way to look at things. I haven't done the calculation, but I'm sure I'm well behind you in terms of this breakdown (i.e., *way* more than half comes from current income).

Of course, this will change over time, and I'm well behind you in terms of age, too. ;)

[DWorth]

Just curious, how do you handle depreciation in your NW calcs? I have been tracking my NW for about 10 years. About 7 years ago, I got more formal about asset accounts in Quicken to track the value of big ticket items like cars, furniture, electronics, etc. I enter what I paid for it, schedule depreciation, typically somewhat accelerated, that keeps the asset account at or below true fair market value (what I could sell it for) of the asset.

I like this picture because I feel that depreciation is an expense, but it is not as readily visible as direct cash outlays. What do you think? Of course Appreciation on the house is more fun to enter!

[DWorth]

Just curious, how do you handle depreciation in your NW calcs? I have been tracking my NW for about 10 years. About 7 years ago, I got more formal about asset accounts in Quicken to track the value of big ticket items like cars, furniture, electronics, etc. I enter what I paid for it, schedule depreciation, typically somewhat accelerated, that keeps the asset account at or below true fair market value (what I could sell it for) of the asset.

I like this picture because I feel that depreciation is an expense, but it is not as readily visible as direct cash outlays. What do you think? Of course Appreciation on the house is more fun to enter!

[FMF]

DWorth --

Here's what I do:

1. I don't include household items like furniture, computers, etc. in my net worth at all. For me, the total value of these is small relative to my other assets and there are too many things to track to make it manageable, so I leave them out.

2. For our cars, I look at the Kelly Blue Book value for the next year and have Quicken automatically deduct depreciation charges each month so at the end of the year our cars are woth the KBB value.

3. For the house, I either raise or lower the value of it once a year based on comparable house sales in our neighborhood. I'm also fairly conservative with my estimates, so I have a buffer in case I'd ever need to sell (and thus have to pay selling costs.)

[Lord]

One can always look at these from the good side or bad. It is good you have sufficient income and savings to make such a contribution. The other criteria is how close your investment income comes to meeting your expenses. One can order these by necessities, comfortabilities, and luxuries to see how close one is to the retirement one desires.