Creating your own death spreadsheet part 2 – net worth tracking

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So… once you have the total cost of your expenses nutted out and indexed for the rest of your life, you come to the part where you need to calculate the income required to meet those expenses. I’ve written about the income my family will need in retirement here but another important part of the equation is to keep track of your net worth – particularly for future planning – and not just the income producing assets. For example, our home is worth nearly $1m, makes up about one third of our net worth and while it doesn’t produce any income right now, it is important for us to keep track of the value in case our circumstances change and we are required to think about how to better deploy that capital for our financial needs.

What is net worth? In my head, net worth is your family assets minus liabilities. Prior to getting serious on our financial future, our net worth would have been barely in the black territory – closer to zero, more like it- as we had a mortgage of $350k. But after some serious knuckling down, some employment payouts and some granularity on the value of my husband’s superannuation pension, our net worth is tracking quite well for our early retirement.

Some net worth trackers out there include the family home; others exclude it. I like to think of the family home as part of the potential income earning asset pool, because you can create ways to use it, like Air BNB, hosting a student; or downsizing later for less and using a smaller capital pool to generate income.

As I share these numbers and the calculation methods, it is not lost on me that my family and I are in an incredibly privileged position. We are both educated. My parents started off in financial dire straits but slowly built some wealth over time (they showed me how to do it, really). My husband’s parents were educated and had successful careers. Both of us were fortunate enough to go to university and have had reasonably successful careers, living in the highest income per capita city in Australia. Jobs are plentiful here. Even though we have both been through redundancies at various times, we have enjoyed a short break and found work within a few months, without any financial losses.

But once again, I find the financial independence numbers for an Australian context hard to find out there in web-land, so I put ours out there to start filling the void. I hope others are prepared to do so too, so we can build a context rich picture for other aspiring financially independent people out there.

We paid down our mortgage following the year of austerity and have no other forms of debt, so I’ll be reporting on our assets only. I use an app called Wealth+ and manually enter the numbers each little while. The numbers fluctuate because we invest the share market; our house increased in value by $50k during the year and we got a closer idea of the value of my husband’s superannuation which boosted our assets significantly. He has a defined benefits scheme and we previously valued it based on his annual statements. Now we have moved the fund to cash and have received a pension estimate from the fund, we have valued his super at 25 x the annual net pension, assuming he lives until he is 80 and draws down from age 55.

So here are the screen shots of the app. We started tracking our net worth on the app in February with a commencing value of $3.423m. As at 28 July, our net worth is valued at approximately $3.545m.

net worth 2

net worth 1

The categories I track are below:

net worth categories

I love watching our progress. Investing and saving can be hard if you can’t see the gains. Knowing our net worth has increased by nearly $120k since I started tracking this February is so motivating and really exciting to show my far-less-interested husband (giggle!) about the progress we have made this year.

Do you calculate your net worth? What method do you use? How do you find it compares to the US versions of FIRE?

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Financial independence update May 2018

NGV

This is from the Triennial exhibition at the National Gallery of Victoria – spectacular.

It’s been awhile on the post (apologies friends!) but sometimes life takes over (like teenagers and their needs) and priorities change. But I’m keen to let you know where we are up to on the financial independence journey and tell you we have 925 days to go until we are financially independent.

NINE HUNDRED AND TWENTY-FIVE DAYS

Feels like an eternity and super close, all at once. I have a countdown app on my phone and I when I started it, the number was 1009 days. In a very short period of time, over one hundred days have passed, so this is going to fly by quickly.

countdiwn

So I am keen to write a bit more on this topic and share with you how and why our finances allow us to live a simpler life.

For this post, I want to share with you our financial independence plan. Not to brag, or to be compared to others. I’m just doing it to actually disclose my numbers and my plan, so anyone doing research on this topic can find some cold hard numbers. Lots of websites talk about “…x times my annual expenses” or $1m at a 4% withdrawal rate. But a lot of these sites are from the US and while they are interesting to read about, I am often left wanting after a google search to find something that represents middle class, urban Australia. And if you can’t find, it create it. Start a conversation. That’s my view.

So we have two scenarios we are working on. One is base level, worst case, where both of us feel compelled to leave our jobs immediately…..(usually a Sunday night sort of conversation at our house – let’s call this the Sunday night calculations) and the more realistic and comfortable version, where there is enough padding (let’s call this scenario Padded FI). Sunday night calcs involve finishing up our well-paying jobs with current savings and just earning enough to make our living expenses between now and December 2020; Padded FI (Financial Independence) see us working in our well-paying jobs until December 2020 and continuing our current savings rate (around $50k per year).

One more thing before I disclose the numbers – we have a two-stage strategy. I am 45; my husband is 52. We are close enough to superannuation to take this approach – Stage 1 Before Super and Stage 2 After Super. But I think anyone contemplating financial independence in Australia can think about it in two stages – pre-super and post-super.

For us, it looks like this:

Now:                   Work to save/pay living expenses until December 1, 2020

Stage 1:               Live on my husband’s superannuation, which he can access from 55 and supplement with investment earnings (2021-2032)

Stage 2:               Access my superannuation at the start of 2033 when I’m eligible to start  drawing a super pension (aged 60) and continue my husband’s (indexed)                          superannuation pension

US case studies rely on the 4% withdrawal rate for thirty-somethings, for the rest of their lives. We only really need to build sufficient passive income for a twelve year period to supplement my husband’s superannuation, before accessing mine.

In Australia, for those families with superannuation, the numbers might work a little differently. You may find you need to live off investment incomes for a period of time until you can access your superannuation. Or you may decide to supplement lower superannuation pensions with some investment income. Either way, it’s important to do your long term financial projections to understand your particular circumstances and discuss your strategy with your financial advisor. Ours got the tick of approval a couple of weeks ago at our annual appointment with our financial advisor.

Stage Income total Sunday night Padded FI
Stage 1 Husband pension $       73,621 $         73,621
Investment earnings $       27,433 $         29,819
Income total $     101,054 $     103,440
Savings remaining $               – $     120,000
Stage 2 Husband pension $       86,414 $         86,414
My pension $       40,000 $         40,000
Income total $     126,414 $     126,414
Savings remaining $               – $     120,000

 

As you can see, the difference in income is not that great, but the financial security of some money in the bank is worth the otherwise sleepless nights of not having a safety buffer. So we push through working more and continuing to adhere to the budget, in order to enjoy the fruits of our work later on in life.

Do you have a financial independence plan? Are you thinking about retiring early from a job and pursuing other business or creative interests? If you are game, share your numbers 😊

Part 4 – net worth tracking (stop yawning)

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As part of my five part series on family financial management, today’s post is about net worth tracking.

One of the biggest questions that I have turned my mind to over the past eighteen months or so is our family’s net worth – that is – our family balance sheet. It’s a bit like putting a business lens over your family finances and seeing whether the family company is actually growing its asset base.

So net worth tracking – what is it, and how do you do it?

It sounds so fancy, but simply put, your family net worth is calculated by deducting your liabilities from your assets, and bingo – that is your family net worth.

So, why should I go to the trouble of working out what our net worth value is? Five simple reasons:

  1. At any given point in time, you can see whether you are growing your family assets and achieving your financial goals. You can also critically examine composition of your assets, for example and see whether you have any over exposure in terms of risk that you may want to readjust.
  2. You can also see whether you are financially going backwards. For example if property values are falling and you are only making interest only payments on your mortgage (the principal is not reducing) you are going backwards, financially. If you want to change the situation, by tracking your net worth, you will be alerted to this situation and will be able to re-jig your finances accordingly.
  3. Net worth calculations will keep you honest and real about your financial situation if you track it over time. It’s easy to redraw cash on the mortgage to pay for an overseas holiday or put a pool in (we have done this one!) and continue to dip into your redraw facility like it is free cash without any consideration of the long term financial impacts for you and your family. Watching your net worth stagnant over time as a result is an eye opener. We did this for about three years. A combination of seeing our static family balance sheet and a strong urge to spend more quality time with family and less time at work propelled us into action (the Year of Austerity) and beyond.
  4. Net worth calculations are super important in retirement planning. I’ve found that being on this side of 40 has really sharpened my interest in knowing whether I will have enough money to seriously retire and focus on projects that I am actually interested in.
  5. It’s important for estate planning. Perhaps for my generation, intergenerational wealth has not seemed as necessary (I’m a self-starter and have made my own way in this world financially) but for our children, market predictions on employment prospects and economic growth generally are looking a bit bleak. I’d like to think that I will have some $$ to leave all of our five kids as a back-up fund for them and their future families in times of hardship.

For the purposes of being a useful calculation, you want to not include the short term, small assets that can seriously fluctuate at any given point in time. For example, our “trading” account, where our salaries are paid into and our credit card is paid out of, can wildly fluctuate between $12k and $50 depending on what time of the month it is, and whether we have paid our credit card recently. Because this could overstate or understate our net worth position at any time, I leave it out of our calculations.

Similarly, on the liabilities side, we pay off our credit card in full every month and it could have either $2k on it, or $9k, so again, I leave it out of our net worth calculation.

If, on the other hand, the credit card was not being paid off each and every month, and had become core debt – a long standing liability – then I would definitely deduct it off the family asset balance, because by not including it, I would not be viewing the true family financial position.

So, again, in the interests of being open and transparent, for our family, I’ll share our net worth position as at today.

Six monthly I usually do a little bit of my own real estate research to estimate the value of our family home and I use our six monthly superannuation balances to calculate super. I have to say, since the Year of Austerity and paying off our mortgage, we look financially under control and I like that.

Our net worth looks something like this:

Assets

Family home                                                      $700k

Savings account                                                $ 61K

Superannuation                                               $556k

Shares                                                                  $   5k

Total                                                                      $1.322m

Minus Liabilities

Core credit card debt                                     $0

Mortgage                                                            $0

Net worth                                                           $1.322m

 

Now I realise for some this is as boring as bat shit. But for me, it completely motivated me to think about running our family like a business so I could absolutely understand the goal posts of what we needed to save to retire (see next fortnight’s post); what we needed to budget for in the short term and therefore how much I needed to work and most importantly HOW MUCH TIME I COULD ACTUALLY SPEND WITH MY BEAUTIFUL FAMILY and not feel guilty about whether I had planned financially for the future.

I was easily prepared to be very bored to work that all out!

Give it a go, and tell me what you think. For some it will be facing the music but the music won’t go away by ignoring it.  For others, it might be quite surprising and liberating….