It was December 2011 and I was 47 years old with a net worth of $155,719. Think about that (I have), it took me 24 years attain $155,719. I was two years away from kids starting college too.
Feelings of failure, panic, and anxiety hit me hard during that Christmas break from work. Needless to say, I wasn’t in a festive mood. But as the father, husband, and sole income provider I needed to show calm and resolve.
I had two weeks before I went back to work to get my mind right and get my financial plan in order. Debt, low savings, and unknown expenses were all problems that needed to be solved. Five years later (2011 to 2016), I increased my net worth by $267,222 dollars to $422,000 ($155,719 to $422,000).
Now that we’ve gotten past the history lesson, let’s discuss the most recent 3.75 years (2017 to present). It took me 5 years (2011 to 2016) to increase my net worth $267,222. It’s taken me only 3.75 years to increase my net worth another $470,654.
Today, we’ll examine the moves I’ve made and the buckets that make up my net worth. Just for a reminder, net worth equals assets minus liabilities. The goal is to increase your assets and decrease your liabilities. It will be evident that I’m been attacking both buckets pretty aggressively over the past 3.75 years.
Assets
When you’ve got debt, many people will choose to focus on reducing that versus building up assets. We’ve done a lot of debt reduction the last few years (discussed in the next section) but I’ve focused on doing both. If I was younger, I might focus more on increasing my investments. But with retirement getting closer I did a mix.
Investment Bucket
Since January 2017, I’ve contributed $190,457 to my 401(k) and taxable investment account. I’m limited to what I can contribute to my 401(k) and I started really focusing on the taxable account in 2018. The investments haven’t done so well … 2019 was great but 2020 has been horrible.
I’m staying fairly conservative in my 401(k) because I’m under 5 years to retirement. Sequence of returns risk is high on my priority list of things to consider. My taxable accounts are all in individual stocks and many of my new contributions will go there too.
The focus is on my savings rate and making sure I contribute as much as possible. The goal is to have $1.3M in investments by the time I retire. Honestly, I’m not sure I’ll reach that amount. I’m really going to have to crank it up my last few years before retirement.
The house has done nicely, in fact a neighbor just sold the same house for $402,000 a few weeks ago. Either way, my focus is on paying off the house and not so much on the house value. Many Americans are house rich and retirement asset poor. House rich with no retirement assets is not the way to enter retirement. Unfortunately, this will bite many in the butt and the consequences will show in retiree’s quality of life.
I don’t plan on tapping my home equity in retirement. If anything, it might provide a nice long-term care option at some point. But I’ll be happy to have the mortgage expense out of the way upon retirement. Give me a place to live that is paid off and I’ll be fine.
My pension, social security, and investments will carry my retirement and not the house. Other than selling their homes, I’m not sure exactly how retirees will effectively tap home equity but it will be an important development to watch.
Debt
My attitude toward debt has changed since I became focused on building my net worth and investment portfolio. If I could focus earlier in life on my financial status (a nice thought), I recommend creating rules for debt usage. Just like you might have an investment policy it might be wise to understand how debt can be used in life.
We are really proud of how we’ve attacked our debt these past few years. Honestly, it’s just been our behavior adjustment that went from accepting our debt fate to hating debt. We hate debt now and make sure it stays out of our life unless we use it with strategic intent.
Loans
A few years ago, we had two car loans (~$30,000) and one home equity loan (~$60,000). Our interest rates were low on all the loans: 0.99% and 3.99% on the cars and about 2.5% (adjustable) on the home loan. Rates were starting to rise and we knew the 2.5% home equity loan had the potential to double quickly.
This is were our hate for debt really started to bubble up. Rather than invest the funds, we used our bonuses to pay off the HELOC debt in about 4 months. It was painful to not invest the funds but it really started our path to becoming debt free (which we’ll be next year).
Credit Cards
Carry credit card balances means you don’t have the funds to buy something today. In other words, you are not living within your means. The nice part about using an app like Personal Capital, you can easily see credit behaviors.
The last few years have shown an unnecessary trend of letting my credit card balances build until I received my annual bonus. Talk about a trend, you could set your clocks to my credit card balances. In 2020, I’m stopping that trend and not carry any balances. This trend has occurred for several years but was much worse 5+ year ago, as evidenced by my previous $8,700 balance.
My recommendation is to only use credit cards if you can pay them off each month. If you can’t pay off the credit card then save your money to purchase the item(s). In other words, be patient and wait.
Having two types of emergency funds helps too: (1) Long-term fund ($10,000+) for things like unemployment or major medical expenses and (2) a short-term fund (~$2,000) for car expenses or expected smaller costs. These funds will keep your credit card balances from getting out of control. When you draw the savings balances down then quickly fill them back up and then rinse and repeat.
Mortgage
As you can see, once we got our credit cards and other loans under control, we turned our attention toward the mortgage. Around 2015, we refinanced the mortgage loan to a lower rate and shorter term (10 years) so that it would be paid off at retirement.
But again, our hatred toward debt gave us the attitude to attack the mortgage too. Studies have shown that 55% of workers over 50 years old are laid off from work and only 1 out of 10 get back to their regular income. Having no job when you have a mortgage and other debt is a scary thought.
This potential reality (I’m 57 now) got our attention and you can see trend on the mortgage balance accelerate downward quickly. We expect to have the mortgage paid off in 2021, about 4 years sooner than expected. This will enable us to increase our savings rate the last 4 years of working to over 60% (from about 40% today).
Summary
All these charts are just the outcomes of changes to my behavior. There are many moving parts to financial improvement and they usually occur with intentional actions. Rarely can you do just one thing to accelerate your net worth (though increasing the savings rate is my choice).
Life does get in the way at times. Losing a job or unexpected expenses are usually beyond our control. But we do choose how to prepare for kids college expenses. We also control how we prepare for unexpected expenses by having short and long-term savings funds. Even with unexpected expenses, we can regain control by being proactive before the event hits our finances.
To summarize the parts of my net worth these last 3.75 years:
- 37% = Home value to net worth. By the time I retire, I’m hoping this is under 25%
- 63% = Investment portfolio to net worth. The closer this gets to 80% or higher the better. Most American’s are house rich but retirement fund poor and that will issue will shape American retirement.
- $190,457 = The investment contributions I’ve made in the past 3.75 years. This all the while having two kids in college and paying down my debt an extra $116,472. Technically, this $190,457 in investment contributions could have been $306,929 but I chose to attack debt and invest simultaneously.
- $0 = Credit card balances. This is a choice I’ve made that changed my relationship with credit cards. I recommend everyone do the same!
- $116,472 = These extra loan payments (mortgage and HELOC) have been a net worth accelerator.
The fourth quarter of each year is a great time to plan for the next year. Know where you spend your money and set some goals. If you have a significant other in your life, it’s best to get them onboard with your plan too.
And there you have it …. create a plan and execute on that plan. Most people who successfully increase their net worth say they built it slowly. Tough choices will need to be made but that is to be expected for anything that is worth while. Don’t make excuses. If you are like me, then you’ve got nobody but yourself to blame for an unsuccessful financial past.
Thanks for reading!
Mr. TLR