Building net worth using rules of thumb

We’ve been discussing net worth from many different angles lately. I wanted to visit the subject of real estate, and how several of the popular “rules of thumb” would work towards growing our net worth.

You just found a half of a duplex for sale. It’s new, meaning there aren’t many big items of deferred maintenance sneaking up on you. It is listed for $100,000 in a great section of town. After sizing things up, you pull out Thumb Rule #1: Rent it for 1% of the purchase price per month. That would mean we can fetch $1000 a month. Local research shows that similar units from the same builder are fetching that much rent, so you should be able to find a tenant. So, is $1000/month going to work?

After I dig up one of those handy online mortgage calculators, I punch in $100,000 value. Let’s assume I already have hit the four mortgage limit, meaning I will have to put down 25%. This means I will get a mortgage of $75,000. After getting off the phone with my favorite mortgage broker, he says he can probably lock us in with a 30-year fixed, 4.5% loan. This mortgage calculator happens to have a place to enter property taxes and PMI, but not insurance. I zero out the PMI, but decide to bump up the property taxes to 1.5% to represent taxes and insurance. It spits out a required monthly payment of $505 and change.

Time to check Thumb Rule #2: Does the rent equal or exceed PITI? PITI is what real estate investors use to refer to Principal + Interest + Taxes + Insurance, i.e. the total amount needed to keep the bank happy. In this case, the answer is a clear yes. In fact, our rent is almost double the mortgage payment. In highly complex investor-speak, this is cash flow positive.

But that’s not everything. Let’s assume we have a day time job that supports us, allowing us to invest any extra rent into the property. In order to do that, we need to hire a property manager. Hot tip: good property management ain’t free. Duh! But once found, they’re worth every nickel. You want to answer the call at 2:00am about fixing a stopped toilet? I sure don’t. Let’s assume we can find a property manager with good credentials that charges 10% of the gross rent each month, and gives us the rest + a nice emailed report once a month. After shaving $100 of the top, we get a nice automated deposit of $900 sent to our checkbook each month. Yum!

Still looking good, right? Dang, don’t say that! That would be like writing an engraved invitation for Murphy to show up and take pot shots. Now that I think about it, why don’t we factor Murphy into our plan? In fact, hoping you don’t into trouble is a terrible strategy in building any wealth plan, especially investment real estate. Time to deploy Thumb Rule #3: Assume 50% of rent is eaten up fees, taxes, insurance, and repairs. Is there still enough to pay the bank’s Principal + Interest? Considering we started with $1000, that would mean we only get to pocket $500. Uh oh! Our mortgage payment was $505?!?!

Not so fast! The mortgage payment stated above includes taxes and insurance, and we also had to pay $100 to the property manager. In other words, taxes, insurance and property management fees are all included in that $500 hit we took with Thumb Rule #3. If we go back to the mortgage calculator and zero out that property tax field, then we can get purely Principal + Interest. Crunching it yields $380, which is still less than the $500 we get to pocket from our renters.

This means we can still pay the mortgage and be cash flow positive with $120 to spare. But we’re not through yet.

Ever heard of O’Toole’s corollary? Murphy was an optimist. We have factored in a decent possibility of having extra expenses that are beyond our control into monthly rent. But this assumes we have rent. What if the unit is vacant? One thing positive: no fee for the property manager. We still have to send the bank monthly mortgage payments. So, let’s invent Thumb Rule #4: Set aside 12 months of mortgage payments. That adds up to $6000. Round it up to $10,000, and you should feel pretty good sleeping at night.

What does this add up to? Let’s fast forward five years. Mortgage calculator says that we should have gained about $7000 in equity. Remember how the 50% rule left us with $120/month of spare cash? Added up over five years, and we have another $7200, resulting in a total growth of over $14,000. Divide it by our original investment of $25,000 down, and we will see over 56% total growth of our net worth. Take the fifth root (five years), and we get an annualized growth of about 9.4%. Not bad for a highly conservative estimate that includes getting hit hard by Murphy.

If there is an ounce of appreciation, or if we invest that extra cash flow to pay off the mortgage, we will only do better. If rent increases at any point, I won’t complain. The trick is finding the right piece of property and having the discipline to set aside the cash to insulate us from issues. We must also not tap the cash flow. By plowing it back into the rental property, our success will be much stronger. For example, if we have 100% occupancy for all five years along with no repairs, but still no appreciation or rent increases, our annualized growth rate could soar to over 17%. Show me the mutual fund that works that well after factoring in the risk of Murphy taking shots at you.

Thumb rules work until they don’t

So far, we have examined a piece of property on paper using spreadsheet formulas. Spreadsheet-based investing can be risky and detrimental to your financial health. That is because too many people think that is where the analysis ends. Instead, this is where things begin. When a piece of property passes all these checks, it means it MIGHT be good enough, but requires more research.

Don’t shoot for a property SOLELY BASED on these rules of thumb.

There are lots of small factors that can shoot deals out of the water. Remember me mentioning at the beginning that this was half of a duplex? One of the first questions this should spur is whether or not each unit has its own utilities. Tenants that share utilities like water historically consume more because it doesn’t hit them directly. There is also a side effect that if a water main breaks, it doesn’t get fixed as fast, because the cost doesn’t get passed on to the tenant. Water is one of the most damaging things to housing. Delays in repairing broken water pipes can translate into longer term maintenance costs as well as less net rent in your pocket due to inability to increase rent to compensate. Hot tip: split or joint water meters don’t often appear on the MLS or any website. It requires boots-on-the-ground research to track down.

Another factor is the agent you use to find rental property. If you’re shopping in your local area, don’t bet on the agent you used to find your primary residence. They may get you in for showings, but they probably won’t have much insight into the investor side of real estate.

Simply put: if something appears too simple, then it probably is. Find a piece a property for sale that meets are the rules of thumb, but it’s been listed for six months? Why didn’t the other investors in your area already scoop it up??? Spreadsheets may be good for turning a long list of properties into a short list, but get on site, check out the area, and call up an expert in this area to double check things.

Real estate can build wealth

Emphasis on “can.” You can also buy a chunk of swampland, and spend all your money trying to drain it while fighting off the alligators. But that shouldn’t be your reason to skip real estate altogether. Read, read, and do more reading. Visit places like BiggerPockets.com and learn as much as you can. Never stop. Real estate provides some of the best means to building long term, cash flowing wealth available combined with great tax laws such as depreciation. If you want to talk more, drop me a line.

Advice based on risk but not net worth doesn’t cut it

I was listening to a radio show recently, and the caller was debating with the host the fact that while he held mutual funds, he had also invested in stocks over the last 10 years. Given that I have been writing several articles about net worth lately, I felt particularly attuned to the lack of attention to net worth. When the host asked how much he had in savings, the caller answered $96,000. When he next asked how much he had in the stocks, the answer was $47,000.

The host immediately went on the war path. He slammed the caller for having a broken risk meter. He asked the caller if he really thought he was going to “beat the odds.” He told him he was playing with fire. The fact that the caller had bought some tobacco stocks because people haven’t stopped smoking was dismissed as a frivolous strategy. The host indicated he probably knew more about stock investing than the caller, and that he flat out didn’t hold any single stocks. The call kind of ended there. I was a bit stunned!

Can you spot the rights and wrongs amidst all this?

First of all, the focus of the host was all about risk. The fact that the caller’s total net worth was just shy of $100,000 never entered the foray of discussion. The host chewed him out for buying stocks (making good on-the-air schtick), but didn’t get on his case for simply not saving enough. The Federal Reserve bulletin which comes out every three years shows that the average person in their mid 50s has around less than $60,000 in retirement savings (page 28), which is way low for building a retirement plan. The caller was a little better, but not much. Considering he had been investing in stocks for at least 10 years means the caller must at least be in his mid-30s. The fact that his net worth was way low for a good retirement was flat out not covered. The caller doesn’t seem to understand the truth about net worth and the reason we need to build up a portfolio of performing assets.

From there, the conversation went downhill. The host of the show berated his caller for basing stock buying decisions on what products are commonly used. The caller clearly knows that tobacco products aren’t going away anytime soon. In fact, the most successful investors of our day, including Warren Buffet and Ben Graham, preach that we should only buy companies we truly understand. If you look at all the products you use for your morning routine, you may spot things that millions of other people are using every morning as well. This leads to some potential stocks that deserve additional research and analysis to consider for purchase. While the host was correct that study after study shows people can’t beat the averages in day trading, buy-and-hold over the long term has been shown to succeed and build wealth, if you know what you are doing. As Warren Buffett says, “I buy on the assumption that they could close the market the next day and not reopen it for five years.”
The host said this guy had too much in stocks. That is something I agreed with. But the host implied that the answer was mutual funds. People buying mutual funds have a long term average performance of less than 4% annual growth. Not good enough! This caller needs something with a better, long term, double digit growth factor. The answer is investment real estate. It allows us to use safe amounts of leverage while taking advantage of some of the best tax laws on the books. Over the long run, real estate typically has a better appreciation rate than stocks. But don’t base your analysis of a piece of rental property on appreciation. Instead, base it on no appreciation and no increases in rent. If it’s in a good location and built with good quality, then you may be closing in on an opportunity. The less deferred and potential maintenance the better.
I’m sure if the caller had mentioned the idea of real estate backed by debt, the host would have shot that down in a heartbeat as risky and especially dumb when debt is brought into the picture. There definitely is risk involved, but that’s not reason to drop the whole idea. Instead, we need adequate cash reserves to mitigate this risk. There WILL be vacancies, repairs, and other costs to deal with, all which require a certain amount of easy-to-reach cash. Assuming Murphy will make an appearance and planning to deal with that will let you sleep at night.
The fact that the host was driven by risk and didn’t discuss net worth tells me he is imbuing his callers with a fear-based investment strategy. “Go for mutual funds. They are your best tradeoff because they let your money grow faster than CDs yet protect you from the total brunt of market corrections.” Okay, the host didn’t say that, but he might as well have. Fear isn’t enough to build a retirement plan. The diversity of mutual funds may protect you from certain losses, but even worse, they also protect you from recoveries even more.
In the math of losses and gains, you need gains bigger than your losses to get back to where you started. 20% loss requires 25% recovery to get back to where you started. 50% loss, 100% gain. We call that stacking the deck against you! Instead of wasting your time searching for the right mutual fund, find someone who is skilled at pursuing rental property and has a proven track record of building net worth for their clients. That is something that will, in wealth building lingo, cut it.

Are you following the herd when it comes to building net worth?

Last month, I had broadband internet installed at our town home in Florida. Using my iPhone as a hotspot for my laptop was simply inadequate. (You may wonder what internet support has to do with net worth, but I promise we’ll get there.)One thing that I had forgotten about was how wireless networking uses channels. This is something you never really notice, because it’s hidden away behind the popups used for configuration. You have dig around and find an advanced window to glean any information. Why are channels important?

Because it’s a town home, we have lots of neighbors in close proximity with internet service. Whenever you want to connect to a network, there are lots of them listed. I can see the names and signal strength. This is supposed to tip me off about which one is closest. But I’m probably only going to connect to my own, so this information isn’t really that useful. One thing that is left out is the channel number everyone uses. I realized that if any of these shared a channel with either my iPhone hotspot or the wireless router I was setting up, efficiency would take a big hit, and slow down my internet connection.

To figure out what channel everyone was running, I needed another app; one that wasn’t on my laptop. I found one and started scanning every network around me. Of the dozen networks I could see, most of them were running on the same one, channel 11. I immediately went to the “Advanced” screen of my iPhone and switched to channel 5, one that nobody was using. I noticed a slight improvement, but not much since the iPhone itself wasn’t that fast.

Later when the internet installer arrived, he had me up and running in less than 15 minutes. I was now able to retire my iPhone and use a real wireless router. I mentioned how it seemed amusing that everyone around me seemed to default to channel 11, and how I switched to channel 5. He responded that most routers default to channel 1, but his own company recommends people switch to channel 11. Do you see the irony?

In order to mitigate the risk of colliding with other networks, the entire herd of internet users around me had been told to move to a different channel. But they were all moved to the same channel. The resulting effect is that the original risk didn’t change at all, but instead moved with them! This is very similar to systemic risk, in that Wall Street advisors and their salesmen will tell us all when to enter and leave various sectors, funds, and other broad categorizations of stock market equities. But when we all move together, it doesn’t really abolish any risk, and instead hides the fact that the risk is still there, setting us up for another whammy when the next market hit comes, causing our net worth to nosedive.

Systemic risk is the game you play when you are betting your retirement on complete appreciation. When you invest in real estate, you aren’t playing that game. You are instead banking on the idea that people need a place to sleep at night, and are willing to pay rent for it. Rental property can be referred to as a performing asset or cash yielding asset. This also means that if other people join me and migrate towards rental property, we aren’t just another herd moving in some other direction, ostensibly carrying the same risk. Instead, we are all buying useful assets that other people will want to make use of instead of gambling on the appreciation of mutual funds.

Remember the reason people take on these plans? To mitigate risk. Well, I need a certain amount of risk. If I wanted no risk, I would buy CDs, but trading in the investment risk means I must also trade in the potential for return on my investment. To mitigate the risk of vacancies, repairs, and other unforeseen circumstances, I have a lot of cash sitting in the bank. To top it off, my entire real estate retirement plan is based on the assumption that there will be NO appreciation of property and NO rent increases. Can’t get much more conservative than that. The estimates run circles around the historic performance of the market, and more importantly, investors buying mutual funds.

The second subtle point in all this, is that the information I needed to solve my wireless networking issue wasn’t found on the front page of either my laptop, router, or iPhone. Instead, channel data is buried in the “Advanced” sections of things. When it comes to retirement investing, some of the most important information isn’t on the front page of a prospectus or what your financial planner is selling you…err…telling you. Instead, it lies elsewhere and requires you to gain some financial knowledge for yourself. Delegating everything to a financial advisor won’t give you the the best throughput for your money.

The truth about net worth

In this latest installment of my series of net worth articles, I dug up the Federal Reserve’s June 2012 bulletin where they pour over the results of the 2010 Survey of Consumer Finances. They conveniently include results from 2001, 2004, and 2007 as well, making it easier to compare certain statistics to check the trends. This document has a lot of detail and can make for a dry read when you try to read every detail, but my focus was on net worth. How much are people saving? In what ways are people saving money? What about debt? And what are the rich doing, compared to the rest of us? Anything we can learn to benefit our own wealth building

First, how is your own net worth stacking up?

Most of the tables in this report are broken down by either income, age, or ethnicity. To read the tables regarding income percentile, you need to first find out what income percentile you are in. If you look at the table below (from page 8), the first set of boxed income shows the median income rates for each percentile. Which bracket of income are you in?

Remember, median is half above, half below. For example, half of the people in the 60th percentile made above $71,700, and half made below.

Fed Reserve 2012 bulletin – Income by percentile and age

As a bonus, I also drew a box around income levels based on age. Where do you stack up? It appears that in general, as you get older, you make more money, until you reach retirement. It seems that people aren’t making as much in their retirement years. Is that a problem? Is it what you were expecting? If that isn’t in your plan, you may need to recheck things.

If you flip to page 17, there is a chart showing net worth based on both income and age. Using your income percentile you just figured out, check out the median net worth in thousands of dollars. Are you above or below the midpoint?

Federal Reserve 2012 bulletin – Net worth by income and age

Like the previous table, I also included net worth by age. Where you do rank in that? This makes me feel good, because I’m ahead of both. But that isn’t the final answer in this article.

The real question is: do I have enough to retire? I’m not there yet, but my plans should carry me there. What about you?

Another nugget of knowledge is how net worth has shifted since 2001. The table above lets us quickly look at previous years. Net worth for all families from 2001-2010 ranges $106100, $107200, $126400, and $77300. What do you think would account for a 17% increase in 2007 followed by a 39% drop?

Rises and drops in net worth are based on where people have invested their money. The two biggest things people are investing in are 401K plans and primary homes. Those both took a big wallop in 2008, and people’s net worth suffered. My own net worth is still 20% down from where I was before the 2008 market correction. It’s part of the reason I realized I needed to get out and find something better.

These are good reasons to start tracking your net worth. How do you track with these trends? Could you handle a 39% drop in net worth if you were in retirement? If you are investing in the same things as everyone else, then that is what will happen! But if your net worth doesn’t suffer from these types of corrections, you may have developed some adequate financial insulation. No way to tell without tracking things yourself.

One of the reasons real estate does so well as a wealth building vehicle, is because even when the value of your property may take a hit, you will keep collecting rent. As an asset, it will keep yielding returns. You don’t have to sell when your property value drops 20%. If your money is in a mutual fund, enough other people may evacuate the fund when it takes a 20% hit that the manager closes it and moves your money to another fund anyway, even if you didn’t want to!

Hopefully this report will help you notice when you see an article from a finance magazine, or someone talking on TV or radio. Are they preaching how investing in our 401K tied in with the magic of compound interest will give us a huge savings? So, where are the people saving up huge chunks of retirement money in mutual funds? That last chart says that the median person in their 60s only has about $200,000 dollars in net worth. How much do you think is in accessible cash vs. home equity? I have been hearing this message for 15 years, so I figured this report would show it, but it flat out doesn’t.

When you hear your financial advisor saying he or she will help you build a portfolio worth over a $1 million, give him a double take and ask him if he really can place you close to the top 10% of people! That is what he is trying to sell you. The chart above proves it. The question is, are you buying? Ask him to show you proof that his other clients are doing this well. If he hems and haws, and tries to show you history of the market instead of history of his clients, run for the door. He is just trying to sell what’s on his shelf, not what’s best for you.

Assets
The report goes on to indicate that cash value life insurance is held in increasing amounts by wealthier people, but overall cash value life insurance assets declined from 2007 to 2010. In fact, all asset classes declined, probably due to people being able to save less and instead consume their income to deal with the economic downturn.
Page 42 has a very clear picture of assets held by people of a non-financial picture.

Federal Reserve 2012 bulletin – Value of non-financial assets

In 2010,

  • In first place, 47.4% of non-financial assets held by people was the equity in their primary residence. 
  • Business equity was in second place at 28.2%. 
  • In a distant third place is other residential property, which would extend to rental property at 11.2%. 

To sum it up, these non-financial assets (which also included vehicles) add up to 62.1% of the total assets people have! With this chart totaling roughly 2/3 of people’s assets, and primary homes being almost half of that, people are investing 1/3 of their money into something that doesn’t generate cash flow in retirement. You may say it keeps you from making a mortgage payment, but that only works if you are setting aside the same amount of money you used to pay on your mortgage into the other cash yielding investments. If you are sitting in your paid off home, and expecting to get by on the measly income from your 401K, you are in for a huge shell shock. Time to brush up on your Walmart greeting.

Looking for more information about rental property, the report says that 14.4% of families own some form of residential real estate, including second homes, time shares, 1-4 family rental properties, etc. Unfortunately, it is hard to break out which types of property are generating which types of cash flow. Second homes don’t yield cash flow. They may generate good family times (something to NEVER underestimate), but they won’t fund your retirement.

Sadly, for a report extending 80 pages, there is little found when actually searching for the word “rental.” It appears that few people have rental properties, compared with the grand scope of everyone, so there are few questions asked in the original survey to gather this type of information. In fact, this may indicate the lack of rental property. If lots of people owned rental property, it would probably become one of the key questions of the survey. I hope this changes, considering 1 out of 8 Americans is a real estate investor. If as many as 11% of people in this country are investing in rentals, the Federal Reserve should start getting more concrete data on this. It might shed more light on the success and validity of real estate.

The Rich own real estate and businesses

One thing is very clear. Looking at page 49, at the breakdown of non-financial assets across income percentiles, the rich have more real estate and business equity than anyone.

  • The top 10% hold a median value of $475,000 in primary homes, $320,000 in other residential property, $200,000 in non-residential property, and $455,000 in business equity. 
  • When looking at the next group (80-89.9% income earners), this drops off to $250,000 primary home, $120,000 other residential property, $58,000 non-residential property, and $82,400 in business equity.

I know that is a lot of numbers, but it speaks plainly. The rich own real estate and the rich own businesses. The rich keep doing what makes them rich, meaning they didn’t become rich through one mechanism and then suddenly switch to real estate and business. If that was true, we’d see another chunk of statistics reflecting the people that had become rich, but not moved their money into real estate and business. In other words, if you don’t invest in real estate or build your own business, you aren’t going to be rich.

The study also asks people that run one or more businesses, how many people work in them. The median point (half above and half below) for the number of employees per business was two, showing how half of the businesses in this country are comprised of 1-2 people. That should be a positive sign to all of us that we can indeed form a business. The report was clear that businesses with more than 2 people accounted for 79.5% of the value of all such businesses. But remember, the first step towards building a big company is to build a small one. No business started out big, already worth billions of dollars and with thousands of employees. But what’s more important is that no business must become that big for the founder to become relatively rich.

Liabilities

Looking at the liabilities section, mortgages against the primary residence is the biggest factor, accounting for 74.1% of all debt. This has dropped barely from 75.2% in 2001. An interesting nugget in the world of debt is on page 63, where it shows total amount of debt, broken down by percentile of income. The top 10% of income earners hold more debt in primary residence, other real estate, and other things. While they have more credit card debt, the median was $8,000, which isn’t a huge amount for such high income. The big difference is holding $180,000 in other residential real estate compared to the 80-89.9% which hold only $88,000. This is a sign of leverage, and the rich understand this. By taking out extra debt to buy rental property, second homes, and other types of real estate, they can add to their net worth.

Fed Reserve 2012 bulletin – Debt by category and income

It also makes sense that most people, even if they aren’t rich, take out a mortgage to buy a house. Mortgages are one of the best wealth building tools we have. It allows us to build up net worth with a limited set of resources. If we tried to save our way towards a 100% cash purchase of a primary home, we would lose so much opportunity, it would outweigh the interest cost of the mortgage. Considering prime, owner occupied 30-year mortgages are now being sold with 3.5% interest, there is no better time  to get one.

It is also a sign of confidence that this country isn’t full of people carrying around $100,000 in credit card/student loan debt, but instead a more temperate truth that most people carry a modest amount of consumer debt that can be tackled. Many people debate whether or not student loan debt should be considered as evil as consumer debt. With consumer debt, you are buying things you want, but arguably don’t need. Student loan debt is to purchase an education that it meant to be a stepping stone towards a long term career which will yield a cash flow. The trick is the cash flow part. If you get an expensive degree at a high price school that doesn’t produce a decent job, you may have picked the wrong path. Standard 4-year college isn’t the only answer either. Some schools will let you transfer credits from a 2-year community college, allowing you to effectively discount part of your education. Another different path are vocational/trade schools. They also can produce careers. College isn’t for everyone.

Bottom line, we shouldn’t fear debt. After all, the rich use good debt to growth their net worth. With a proper view of bad debt (consumer) and good debt (investment/leverage), and a focus on developing cash flowing opportunities and assets, you have the means to build a business and real estate portfolio to grow your own wealth over time.

What is your net worth?

You probably know what is in your checkbook. Most people I run into have some idea how much money they have. I know a handful of people that don’t, but they are few and far between. Face it, it’s natural to track it, since we need to know if there is enough to use our debit card.

But the balance of your checkbook isn’t an important metric for building retirement wealth. To see if you are succeeding or failing on that front, you need to be able to calculate your net worth.

  1. First, biggest step is to quickly and easily tabulate all your bank accounts (do you have more than one?). 
  2. Next, add up your big assets. This includes things like the value of your home. Other real estate. Some people throw in cars. Me? I don’t count cars, because the valuation is always dropping, it’s never worth that much the day you sell it, and in the end, WHEN I plan to sell it, the value has dropped too low to contribute much to my net worth. 
  3. Finally, add up all your debts and liabilities. Basically, to whom do you owe money? Numero uno should be the mortgage on your home. Throw in credit card debt. Auto loans. Me? I have a gigantic liability that I’m going to have to pay the IRS next year at tax time: the rest of the penalties for cashing in my 401K to buy cash flowing rental properties. My estimate is that I will owe 50%. 20% was withheld, so I cranked out what the other 30% was, and penciled that into another column of my spreadsheet. 

Sounds like a lot of work, right? If you have online banking, see if they let you enter other accounts. Mine does. They integrate with lots of 3rd party systems, effectively logging in and finding credit card balances as well as mortgage balances from other lenders. My bank also lets you enter in a street address to a piece of property and then looks up its estimated value from Zillow. Finally, for those accounts they can’t look up, I can manually enter the amount. A rough estimate, I know, but useful in glancing at my bank’s pre-built “Net Worth” report. I have found that this report is pretty handy, and gives me a good readout on exactly what my net worth is.

But the real question here is: WHY do I need to know my net worth? The answer: to tell if your investment plan is succeeding! My net worth includes entries for my 401K plan. Did I mention that I couldn’t make an early withdrawal on my current company plan, so I still have some money there? But there is no way to succeed at tracking net worth, unless you start logging it periodically in a spreadsheet, say once a month. This allows you start plotting the course your finances are taking. If your net worth can be tracked in less than 20 columns of dollars, then you can easily spend 10 minutes a month to grab the numbers and punch them into a spreadsheet.

Add up all the assets. Add up all the liabilities. Subtract one from the other, and you have your net worth. Divide it by the first entry, and you have your total growth. Don’t forget to include the date you gathered this set of numbers. The piece de resistance? Subtract the current entry from the first (spreadsheets convert this into days), and divide it into 365. This generates a nice fraction. Now take your total growth and apply this fraction as an exponent => (total growth) ^ (365/total days). That is your annualized growth rate of your net worth, the “average” rate your net worth is growing at.

Start tracking it. Even if you don’t do anything else I suggest on this blog such as dumping your 401K to buy real estate. Start tracking your net worth. When the next market crash hits, don’t be afraid to either read next 401K and punch it into your spreadsheet. When the market takes a hit, I can bet you that so will your funds. Well, we know that, because the Wall Street financial advisors are telling us that. But more importantly, we will see that their advice about “stay the course” isn’t good enough, and will slowly but surely kill our long term growth rate.

I honestly wish I had built such a spreadsheet dating back to 1999. Then I could really see the graphic carnage that the 2001 and 2008 market corrections did to my net worth. But I didn’t want to. I thought I was doing fine, following everyone else. Maybe if I had been really been paying better attention, I wouldn’t have waited so long to make my own correction to my retirement plan. The reason we tend to “go with the flow” of using 401K-wrapped mutual funds, is because everyone else is doing it, we aren’t aware of anything better, and we aren’t aware of how rough it is to our net worth annualized growth rate over time.