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Archive for December, 2010

Why & How I Calculate My Net Worth

December 29th, 2010 at 08:18 am

Yesterday I did a post about calculating our year-end net worth, and decided to do a followup about why & how I do net worth statements.

As CB in the City said in his/her comment, a net worth statement is a great way to get a big picture look at how you are doing financially. Since I am prone to getting bogged down in details, it's essential for me to take a step back now & then to take a broad view of our finances.

Doing our net worth statement naturally leads to discussions between DH & I about whether or not we want to keep a particular account, re-allocate our investments, etc.

Another reason I like to do a net worth statement that I have never heard financial pundits mention is that for us it is part of our estate plan. When we created our estate documents, I sent a "Letter of Instructions" to my sister/executor that listed all of our major assets. But I made it clear to her that our accounts were always changing (everyone opens & closes accounts, but because DH & I are interest rate chasers, I think we do it more than average people) and told her that if DH & were to die in a simultaneous catastrophe (car accident for example), she should use our net worth statement as a map to locate all of our accounts. I wrote down very specific instructions about where to find the statement, and I always keep it in the same spot.

I used to calculate our net worth monthly, but came to realize that quarterly was plenty. Most useful for us is comparing where we are now to where we were one year ago. We have a spike in income that occurs approximately the same time each year (DH's business has a big seasonal peak), and our biggest expenses occur at the same time each year (paying our quarterly estimated taxes, and paying our annual property tax bill in one shot since we don't have a mortgage). So, comparing to a year ago gives us the most clear-eyed picture of how we are really doing.

As far as what to include in your net worth statement, there are legitimate differences of opinion. My terminology may not be "proper," but I do a 2-part net worth statement. Part 1 is what I call "financial assets": Cash, refundable deposits, bank accounts (including business account), investment accounts (including Treasury Direct), HSA, and tax-deferred retirement accounts. Part 2 is what I call "non-financial assets": For us, this is just our house & vehicles. Other things that some people might include here are: investment properties, art, antiques, collectibles, jewelry. I've decided not to include any of these because what we have is of minimal value and frankly I don't want the hassle of assigning values.

Deciding how to value the "non-financial assets" is a challenge to say the least. Everyone will have to decide for themselves how to do this. I check the KBB Private Party Value of our vehicles occasionally. For our house, I wanted to get as realistic as possible a picture of what we would NET if we were to sell our house, so I started with the purchase price MINUS 8% (to allow for the costs of selling a house, number one cost being real estate commissions) and then I adjust by the CPI-U (because I believe we bought at a non-bubble price and I think it's reasonable to think that over the long run real estate will keep pace with inflation). Remember that we paid cash, so we have 100% equity in our home. If home values in our area were to spike upwards, I would NOT adjust our home value upwards, but if they were to take a big drop, then I would check comparable sales prices and reduce the value of our home accordingly. As I said, my goal in assigning a value to our home is to be realistic, not overly-optimistic. It's not necessarily the "right" way but it's what we are comfortable doing.

When I do my year to year comparison, I'm looking at the TOTAL (Part 1 + Part 2). My DH tends to ignore Part 2 and just look at Part 1 (the financial assets).

Change in Net Worth: end 2009 vs end 2010

December 28th, 2010 at 02:18 pm

I jumped the gun a little bit and went ahead and calculated our year-end net worth. These numbers could change (and our Vanguard account balances almost certainly will), but based on end-of-business yesterday's numbers our net worth increased 12.4% in 2010.

I'm perfectly satisfied with this number.

The value of our tax-deferred retirement accounts increased, the value of our home increased a teeny bit, and we had that tiny capital gain from our almost laughable stock trade. But the lion's share of the increase is from new savings (income exceeding expenses). In my personal experience, there really is no financial advice better than the old adage "spend less than you earn."

The one thing that had a negative impact on our bottom line was buying a new car in January. No regrets at all; I'd buy that car again in a heartbeat, and I know we got the best deal possible on the car. But it did effect our bottom line negatively because the current KBB is less than what we paid, and we lost some passive (interest) income by buying the car.

Saving is Fun ... So is Spending

December 25th, 2010 at 07:52 pm

Yesterday DH & I went out to lunch and then to the Radio City Christmas Spectacular (featuring the Rockettes). It was really a fun show! We both had a great time. Even tho DH & I don't usually exchange Christmas gifts, we agreed the big day out would be our gift to each other. We spent $79 total (lunch, parking, and 2 tickets) and it was worth every penny!

Hope you all are enjoying your Christmas.

Our Stock Trading Days are OVER!

December 13th, 2010 at 06:47 pm

Almost 2 years ago we opened a Schwab account. Since then, we've made a grand total of two stock trades (or four, depending on how you count them ... Twice we bought shares in a company, and then sold it).

Today I called & liquidated the account because my poor DH just couldn't stomach it. After we bought the stock, he'd sit there and watch the price constantly, and even after we sold it he would sit there and STILL watch the price, second-guessing the decision to sell.

Poor guy was a nervous wreck. It just wasn't worth it.

Once he practically screamed at me "How can you be so calm about this???" Well, the answer is that even if we had lost every penny we had put in to the stock we still would have been fine. It wasn't like we had bet the farm. And I knew that my getting excited about it wasn't going to change the price of the stock one bit.

When we sold the last stock, I told him that we either had to: 1) choose some dividend-paying stocks to buy & hold, or 2) cease buying individual stocks forever. He chose option 2. As soon as our last sale had settled, I made the phone call to Schwab and a check is on the way. The check will go in to our savings account, and we will continue with our plain-vanilla investments.

P.S. Since inquiring minds will want to know, no, we didn't lose money. (We made a little in fact.) That's not why we liquidated the account. It was purely for my DH's mental health.