Net Worth, Year 2

A year ago I wrote a post about my net worth and the convenience of having it automatically calculated in an online financial tracker. net17

Since then, my net worth has increased by over $140,000—from about $706,000 to about $850,000.

About 80% of the increase (~$117,000) has been in the investments category.  This is mostly the result of the mutual funds in my retirement account going up along with the stock market over the past year.  Also, all the dividends that those shares have earned have been used to buy more shares.  Of course, I’ve made additional contributions during the past the year.  Breaking it down, the amount of the increase in investments from appreciation and reinvesting dividends was between $90,000 and $100,000 and the rest was additional contributions.

About $13,000 of the increase in my net worth is an increase in the (estimated) value of my house.

Another $8,000 of the increase is the reduction in the amount I owe on my home mortgage.

The remainder of the increase is a temporarily large amount of cash in my checking account.

Last year, I included my old used car (which was worth only about $2,000) in the “Property” category.  I have removed it, after recently buying a “new” pre-owned car.  However,  I have not added that car nor the debt which I will temporarily incur.  The value of the car and the debt would more-or-less offset each other.  I will probably pay off the car debt next month by borrowing roughly $15,000 from one of the retirement investment accounts.

This may be the first time that my net wealth has shown an over-the-year increase that is larger than my annual income.  (I wasn’t watching closely in previous years.)  This seems like quite a milestone on the road to retirement.

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Noticing the Net

You’ve probably experienced how much more real something is when you see it with your own eyes instead of just “knowing” about it by reading about it or seeing pictures.  It sure works with the Grand Canyon.  My kids were certainly more impressed by the real thing than they were with the pictures they saw before they went to Arizona.

Of course, I’ve known for many years that my Net Worth is:

  • The Sum of all Assets
    (mostly the total value of all my investment and savings accounts and the value of my house; however, cars, furniture, and other valuable possessions should also be included but in my case these are of relatively little value)

Minus

  • The Total of all Debts
    (my home mortgage [more than zero] and any student loans, car loans, etc. [zero] and credit card debt [close to zero and paid in full at least once per month]).

And yet until recently I had never actually calculated my exact net worth.  I had only done some very quick estimates.  Years ago, I knew my net worth was negative, because the mortgage was large and was roughly net_worth_2016equal to what my house was worth, my investments and savings were small, and unfortunately I had more debt on a credit card than I could pay off in a month.  (Please learn from my mistake; never allow that to happen.)  I paid off the credit cards.  Gradually the large mortgage became smaller and my house grew in value along with my savings and investments, such that for years I knew that my net worth is a nice-sized positive number, but still it was only a rounded, vague estimate that I calculated in my head.

Since I started using one of the on-line saving and spending trackers (mint.com in my case; there are other similar services), my net worth has been much more precisely fixed in my mind.  Whenever I want to see it, there it is: all my assets, all my debts, and the net total.

One effect of this is that it makes me think even more than before of the importance of paying off that mortgage.  Because now it’s shown to me ever more clearly that the net worth comes from both the assets (which I want to increase) and the debts (which I must decrease).

This seems obvious, I guess.  Like I said, I always “knew” that’s how it worked.  But actually seeing it frequently somehow makes it more real.

Now, when I pay my mortgage, I don’t just see money leaving my checking account, which is the “money gone” phenomena that occurs whenever I buy anything.  Instead, I see the money (a) leave my checking account (seen as “Cash” in the screenshot image above), and then the same money (b) decreases my debt — so the effect on my net worth is zero.  Normal spending (spending for consumption, not investing) decreases my net worth.  All that happens is some amount gets subtracted from “Cash”.  Paying off the mortgage is different: it both reduces the amount of cash I have and at the same time it also reduces the amount of debt I owe.  Seeing that happen, even if it’s only some colored pixels in a little box on a computer screen, motivates me and makes me want to do even more to decrease that debt.