Date published: November 26, 2017
It feels strange writing ‘where it all started’ without knowing how it ends.
For those of you who rudely skipped the reading of our first ever blog post, this isn’t a ‘we did it and here’s how’, this is a ‘we’re doing it, we hope’. So, if this is where it all started, what does ‘it’ refer to? Hopefully not a series of disastrous decisions that led us to financial, physical, and social ruin. But, hey, that could be how this ends – let’s find out.
We started tracking our net worth on the 8th of December 2016, and the 8th of each month is now a special time for us. Tracking your net worth is, in our opinion, one of the most helpful changes you can make to ensure a financially successful future. Primarily, this is because knowing your net worth and witnessing it change in response to your own behaviour and purchasing habits allows you to put all of your purchases, debt and investment decisions in context.
Without knowing your net worth, you are staggering blindly through life, spending, borrowing, and paying interest, while not knowing whether you can actually afford those large purchases, and not understanding how those purchases will affect your future financial security. Tracking your net worth is simple, quick, and anyone can do it.
Normally, our financial updates won’t include a great deal of text, and will chiefly be concerned with outlining our recent progress (or lack thereof!) in a mostly graphical form. Of course, some text will accompany this so that it is clear what has caused recent fluctuations in our assets, liabilities, or net worth.
Something that our more perceptive readers will notice is that our figures lack definite $ values. In other words, we have decided to keep our specific financials on the down low – it’s not that interesting anyway, trust us; there are plenty of people out there who have more money than us. In fact, 1 in 20 U.S. households have over USD $1 million in investable assets, not including the worth of the family home.
Let’s get familiar with the various graphics that we will be showing you on a regular basis.
The progress chart
There’s a bit going on here, but the only actual data that represents our financial standing as of December 2016 are the solid green and red bars, and the blue line. Everything to the right of the data presented from December 2016 is made up for demonstrative purposes (fingers crossed that it works out this way).
Instead of displaying the dollar value of our assets, liabilities and net worth, we have decided to track our progress to semi-retirement (part-time work). But what does this mean, exactly? When our net worth reaches the orange dotted line (our goal line), our income needs to only match our living expenses. No further contributions will be needed to our investments as they will grow through dividend reinvestment and, untouched, may very well double in value over a 10-year period assuming a rate of return of 7% per annum.
So we calculated what we needed to retire completely, and halved it to determine our semi-retirement goal. We will work part time for roughly 10 years while our investments grow to reach our retirement goal. At that point, we can fully retire, if we so choose. This whole plan has been formulated to give us choice. And you know what? If this doesn’t work out exactly to plan, we will still be much much much better off than if we had not started at all.
Let’s take a closer look at the progress chart, and learn about the specifics of the green, red, and blue components. The green and red bars essentially represent our balance sheet for that month. The balance sheet is made up of assets (the green bar), liabilities (the red bar), and net worth.
Assets, liabilities and net worth
An asset is anything that has monetary value – something that can be sold for cash. Of course, this technically can include your clothing, sunglasses, car, and any set of weird overpriced collectables that you so choose to possess. For simplicity’s sake, our assets – displayed in any of our charts – represent only investment, or investable, assets (things like cash, property, shares). The Count’s needlessly expensive watch, and the needlessly expensive earrings possessed by the Countess, are not included. (It should be obvious by now that we are not perfect saving and investment robots!)
While an asset has a quantifiable cash value, a liability resembles a financial obligation, or, more simply put, owed money. Liabilities can have the potential to positively contribute to a successful financial future or reduce your future wealth. This is often determined by whether the liability was used to purchase an appreciating asset or not. For example, a home loan is a liability that can facilitate the purchase of a property that goes on to increase in value over time. On the other hand, liabilities may be used to purchase depreciating assets. For example, a car loan can be used to purchase a vehicle, or a credit card may be used to purchase clothing, or household items, that decrease in value over time.
Of course, some liabilities/loans are used to purchase objects or outcomes that are intangible, such as a credit card may be used to pay heating or phone bills, or a student loan may be used to purchase education. Education, of course, could be considered to be an appreciating asset in that it may lead to higher future earnings! In our case, our largest liabilities are our home loans for our investment properties and our student loans. More on this below.
So that leaves our net worth. Net worth = assets – liabilities. In other words, whatever is left in your asset column after your liabilities have been deducted is what you’re worth (in a financial sense only, of course!). Our net worth will always be able to slot neatly on top of the liabilities column to reach the same level as the assets column; it is the difference between the first two columns.
‘Balance sheet’ – sounds pretty businessy, doesn’t it? Well, it’s supposed to! Something that we learnt early on, after having read Robert Kiyosaki’s Rich Dad Poor Dad, is that you should treat your money and investments like a business. Robert’s philosophy is that every dollar that you have is a potential employee, who can work hard for you to create more employees (or dollars). These recently acquired employees can work similarly hard to create even more employees, and so on.
The individual assets and liabilities
This chart is mostly self explanatory, and it also gives you a lot more detail on the assets and liabilities that we had acquired prior to tracking our finances. In December 2016, we had a small pot of cash, two investment properties (on the cheaper end of the scale), a small amount of superannuation (generated over the last few years of our working lives), and a small amount invested in an actively managed mutual fund.
And considering all of these, you would think that our net worth column would be higher! But not so fast, because on the other hand, we have a credit card, a substantial amount of student loans, a home loan attached to each investment property (of course!), a margin loan allowing for further investment in the actively managed fund, and other debt (primarily family debt – don’t worry, you will see that this is paid off rapidly!). But you’ve got to spend money to make money… Right? Right!
It will be highlighted on the chart during each financial update when assets/liabilities change in value or are acquired or disposed of. In general, you will notice that any substantial increase in the value of one of our investments is offset by a similar decrease in our cash supply.
The equity pie chart
The assets and liabilities chart shows you what we own and what we owe, but it’s a bit difficult to do a visual calculation to determine exactly where our cash is currently parked. To help understand this better, the pie chart shows you our equity allocation, rather than simply the total value of our assets.
For any asset, equity is simply the value of the asset minus any attached liability. For an investment property valued at $300,000 with a $250,000 home loan attached, the owner is said to have $50,000 equity in that property. For a share in a company worth $30,000 with no liabilities attached (e.g. a margin loan), the owner has, of course, $30,000 equity in that share.
In December 2016, you can see that we were over invested in property, but more horrifically you can see that we did not own any index funds.
Shock!! Horror!! Index funds, as you will learn (and as we obviously learned after December 2016), should be the absolute staple of any investment account (in our opinion). Anyway, things change quite drastically over the coming months – stay tuned to find out how.
Thanks for reading, and we do sincerely apologise for the lack of photos of Winston the poodle in this update.
The Count and Countess
To continue reading the ‘Our Progress’ series, our first financial update is available.