Credit Card Debt
If you’re a new reader, let me start out as usual by explaining the credit card debt. I’m actually taking money from 0% APR balance transfer offers and instead of spending it, I am placing it in high-yield savings accounts that actually earn me 4% interest or more, and keeping the difference as profit. Along with other deals that I blog about, this boring activity helps me earn extra side income of thousands of dollars a year. Recently I put together a series of step-by-step posts on how I do this. Please check it out first if you have any questions. This is why, although I have the ability to pay the balances off, I choose not to.
Retirement and Brokerage accounts
There were three paydays in April for us based on a biweekly pay schedule. In addition stock prices are up about 6% from my last update on April 1st, making this month extra juicy. I estimate that capital gains accounted for ~$6,000 of the net worth increase. We also made our IRA contributions for 2007 before the April 15th deadline ($4,000 x 2), as well as $4,451 in 401k contributions in order to be on track to max out this year. All these things together made the value of our portfolio jump a lot.
Cash Savings and Emergency Funds
We did a bad job on increasing our cash savings, due to a big hardwood flooring purchase on top of the late decision to contribute to non-deductible IRAs. Taking into account the increased credit card balances, our net cash actually shrank. Need to fix this next month.
Home Equity
I’ve decided to switch to a simpler way to track home equity, as the previous method was a bit confusing. I have my estimated home value in the asset column, and my remaining loan balance in the liabilities column. The difference is home equity. I don’t use a Zillow estimate because that would put my house at nearly $700,000 in value, and although that sounds nice it’s not very accurate.
You can see our previous net worth updates here.
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Man, the one positive about my very small retirement account is it almost always goes up, because my monthly contributions are large in comparison to the total savings.
It will be a bit unnerving when that is not true and the market’s volatility controls my net worth more than anything else.
You are doing an awesome job! The focused effort on funding the long-term and having some fun in the short-term means that you guys are going to be smiling all the way through life.
NICE!
How DO you estimate your home value then?
Joseph – Thanks for the nice words.
Trevor – That’s a good question. Right now it is just purchase price. I can possibly change it annually to reflect the median % change in my specific neighborhood (not nationwide). Or I could run “comps” once a year as well. I’m open to suggestions…
My family uses tax assessed value to estimate the home value; it’s a [somewhat] neutral party and you get the number from the state with regular updates for free.
If you want to go one step further you can compare tax value to sale price on comps and see if there is a ratio to apply.
What savings account are you using currently? I am still getting a decent interest rate at WAMU at 3.25 and I have not found anything to make me bother moving yet.
My wife and I decided not to include home equity in our net worth calculation. Since we always plan on owning a home, it’s unlikely we’ll ever see any of the equity we have in our house (or will have in future houses). The only way the cash would be available to us is if we downgraded or moved to a different area. Additionally, if we sold and used a realtor, we’d be hit with 8-9% in fees/taxes so using the purchase price of our house as it’s value in a net worth calculation doesn’t really work for us either.
Thoughts?
kevin, I hear you but till last year, I had around half a million cash. now I am down to nothing after purchasing 2 properties. What about this situation?
Hm, maybe i should revise to say we’re not including our primary residence in net worth. I think if we owned more than one property, we’d try and figure out a way to value it. Maybe comps minus 10% for selling fees? Property can be a hard thing to value properly when trying to come up with a net worth.
Right now I use a combination of things to arrive (hopefully) at a close average. I use Zillow and compare values against houses for sale in my neighborhood, along with tax assessment value and area median change. Not truly accurate, and a little cumbersome/subjective, but it gives me what I think is a closer number. Using straight purchase price as you do would overstate my net worth by about $40k given current market conditions.
One good valuation concept I’ve used is “what could I sell it for TODAY if I needed the cash NOW?
Everyone should do whatever helps them get to their goals. I think houses are a legitimate part of most “net worth” definitions, but if you want to just track your “liquid net worth” or whatever then do that. I don’t focus on my home equity right now for my goals (just want to have it paid off by retirement) – but I still think it’s worth tracking.
All houses have some sort of market value, even those in depressed areas. (If anyone wants to give me a free house, let me know…) Lots of way to estimate that. If you can’t sell your house for purchase price, then that’s probably not market value. I do think I could sell my house for *my* purchase price pretty easily, so that is what I’m using for a estimated market value. Zillow just uses comps and is giving me value of nearly $700k. The comps I found – even recent ones – are higher than what I paid. But that’s just me, and my one single house.
I have a question, first I must confess that I suck at financial math. What would be the true rate of return when you have money in a high yield savings account earning less say 4% (to keep the math easy) and you make all your purchases with a 1-2% rebate cash back of a credit card?
Considering that I make all my payments in full and do not carry any balance, what would be my true rate of return on that money?
Thanks and congratulations on your blog!
29, house paid off, NW 310k – got ya beat.
But you are making quicker progress than me, and I don’t crunch the credit cards.
Since my intention is to be debt free sooner than later, I like to have the house in my net worth equation. I think it is better that way because you want to know what financial decisions over the long run do for your net worth. Not having all assets and debt in your net worth equation doesn’t allow you to see the overall result of your decisions in life. One sugestion on tracking one’s net worth. I subtract out commisions and expense for selling a house from the asset portion. Also, I have a line in my liabilities for future income taxes. I take a middle of the road percentage, since it can vary widely and is unpredictable what it will actually be 30 years from now, of my tax derred accounts. I feel these two things give me a realistic view of my worth. Hope to be worth over $300k by end of this year. I’m 32.
“NW 310k…” – thats my after tax, liquid investment money excluding any property or retirement accounts
(there’s always someone doing better)
as a renter, i selfishly think home value should only be included when you are underwater on your house 🙂
^ Yeah, it sucks being a renter when it comes to net worth evaluations….
Hey Jonathan,
Have you ever considered rolling over your 403b into a roth 403b?
I’m not sure if Roth is an option for 403b accounts but i’m positive it is for 401k accounts.
Additionally, does your spouse have a roth IRA?
Also adding to the whole can you count the value of your house to your asssets: of course you can:
1. A large number of investors invest in REIT’s and they count them as assets, how can houses not be included?
2. You can accurately track the value of your house. The concept of market value is frequently used in house buying and is a very good indicator of the value. Furthermore, when your house is refinanced, the bank determines quite accurately the current value of your home.
3. Land will always, in the long-run, appreciate. I personally think it was genious of Jonathan to buy a house now with the credit crunch and the interest rates as they are. You’ll see a huge increase in your house value in a couple years. With the housing market recovering, and Florida becoming one of the most populated states, you’ll be set.
Additionally, Jonathan do you have some advice for me?
I’m 18 and going to be putting 5000 dollars that i’ve earned from working at McDonalds during the school year into a Roth IRA at Vanguard. I’m thinking of equally dividing it into 4 index funds in october. In the vanguard S&P 500, the developing markets index, Small Cap Value index, and the REIT index.
Any suggestions or advice? The way i’ve calculated it, i should be able to have 1,000,000 in assets by the time I reach 45 by just investing in my Roth IRA for 10 consecutive years and letting the market do the work, (I plan to be ineligible for contributions in 10 years). The way I see it, I’ll be easily able to avoid income tax on 1,000,000 dollars by investing when i’m in the lowest tax bracket (I plan to be a college student for the next 7 years).
Furthermore, where do you start a site like this?
I see you took on the historical cost / book value for your house… great! This should help you track your long term networth growth… especially when/if you start prepaying. I haven’t seen it in any of your other posts… what do you consider “six months emergency expenses”? Is this mortgage + food + all set bills or some other equation? I currently consider it my total average spend per month.. but the figure I get is extremely high (IE I don’t know if I really want to hold that much in cash/MM). Looks like you may be in the same boat if your target is ~$30K in emergency funds.
New to this blog and very much enjoy it. A quick observation, it looks like most of your money is in retirement accounts, and therefore cannot draw from it until you are 65. Based on your long-term goal I’m guessing you want to enjoy your money prior to that. Why not focus on increasing your discretionary/brokerage account?
hey jonathan, i was wondering if you had a life insurance policy or if you intend to buy one, because i personally wouldn’t, from what i’ve read the roth IRA pretty much functions as a life insurance policy if… well… you croak
also with this six month emergency fund, why don’t you just count your Roth as your emergency fund, i’m pretty sure you can take out your contributions tax free just not your earnings, so if you maxed out you and your wifes IRA then you could earn tax free interest there until retirement and if you ever were in an emergency and needed some you could take it out of there.
As for home values, you should be able to get a sense of its value from neighborhood/zip code sales. I get a free email newsletter with sales from my zip code, there might be something similar in your local neck of the woods (our local newspaper also provides home sale searches free).
And IMO home value should definitely be considered for inclusion in net worth. You can always downsize on retirement, sell it and rent or get a reverse mortgage on it.
Hey bro,
How did you create that bar graph showing your progress? Pretty sweet, but I cannot get Wndws Vista to do it!
Thanks,
RE: home equity (or other real estate equity)
Let me throw out this hypothetical for you: You own not only your home, with it’s associated equity, but also happen to own multiple other real estate properties. They all have equity; do you count that in your net worth? If a person owned X # of land parcels, with no associated debt, do you count that equity, potentially hundreds of thousands of dollars?
Answer: Of course! Now, we could debate all day long on valuations, and real estatet as an investment, but the fact remains: Equity is of value to you and your personal financial statement, and while it SHOULD be counted in your net worth statement, you can certainly hedge your bets and go with a conservative value.
Now LIQUIDITY is a whole different topic. . . . .
Generally speaking, though, and in most circumstances, owning your own home is going to be a good long term investment. Consider the fact that right now may very well be one of the best times in the last few decades to BUY a home. Great deals out there in many areas, especially for your primary residence.