Do you remember when Twitter launched and had its first Tweet ever? That was 10 years ago, in 2006. Facebook had finally conquered universities and was now opening up to the general population and for the first time ever we could download entire movies from iTunes (to iPods).

I started to track my net worth that many years ago. It’s been 10 years and TheMoneyMine household is now approaching the double comma club. This is an article for anyone starting out with their finances to see what a progression to 1M$ looks like.

This article is part of a series on what I’ve learned from tracking my finances for the last 10 years. I’ll post the next articles in the coming weeks and will link back to them in this article, so be sure to check back in.

Part 1 : 10 Years of Tracking my Net Worth : This is what I’ve learned

Part 2 : The Secrets of the Financial Independence Playbook

Part 3 : The Most Effective Tool to Reach Financial Independence

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As a child I had a tendency to question everything. Why, I questioned my dad, is it colder when we go up the mountains? Since we’re technically closer to the sun shouldn’t it be at least a little bit warmer? My dad usually had an answer to the technical questions (hint: it’s the atmospheric presssure). These were fun for him. But when I had questions like why are there so few words starting with Z, the answer would typically be “because that’s the way it is”. (if you know why, please let me know. I’ve been wondering for 20 something years).

In personal finance, we recommend to max out 401ks or to save at least 50% of an income, as best practices to reach Financial Independence. We also often hear that buying a house is a poor investment. Why? Is it because that’s the way it is?

Here’s my attempt at explaining it, using my own experience, by showing how each of these impacted my overall net worth.

Breaking it all down

As I’ve tracked my net worth over the last 10 years, I have not, until very recently, cared to track returns on investment. However, since I have all my accounts online, it is now easy enough to find how much I contributed and what the current balance is. The unrealized gains is the difference. In some cases, where I had gains, I added them back in the calculations.

As my net worth currently stands, this is how the last 12 years of work contributed:

Net Worth Break-down by type of gains
Net Worth Break-down by type of gains

I broke the pie down in 6 categories relevant to my current portfolio. You may have more or less, it depends on your accounts and you far you want to break it down.

  • Cash & contributions : these would be checking and savings accounts, but also all the cash contributions every made to a 401k, HSA, taxable account, house downpayment,…
  • Gains coming from:
    • Stocks & Bonds – across 401k, taxable, HSA, …
    • Home Value appreciation,
    • Stock purchase plan from my employer,
    • Profit sharing plan from my employer,
    • 401k match from my employer.

The Power of Savings

Currently, 70% of my net worth comes from cash positions and contributions that I have placed in all the other investment accounts. This reflects a relatively short investment history, but also the rapid evolution of my income. Gains from investment haven’t been able to compound (yet) faster than my paychecks. I’m knocking on wood with my fingers crossed.

So what have I learned from my net worth breakdown?

  1. Cash & contributions contributed to 70% of my net worth, by far the largest share. It is immediately obvious that a high Savings Rate will have an outsized impact on someone’s net worth. If there is a shortcut to Financial Independence, that is it: save a lot. It also explains why most personal finance bloggers recommend some form of frugality. The benefits are immediate and, in my case, 7 times more impactful than the 2nd highest contributor. Saving is the best tool to FI, hands down.
  2. 401k contributions are the 2nd most important, at 10%, because the 401k match is the second largest contributor to net worth. It’s free money! Admittedly, if I had started maxing out earlier, the share would be larger, possibly double. Take it while it lasts, the day you FIRE this portion goes away.
  3. Profit Sharing and Company discounted stock comes 3rd, at 5% + 5% : I’m lumping these two together because they are employer dependent and market dependent. As we’ve gone through the worst downturn for the Oil & Gas industry, these two accounts have been volatile (they tanked). At a combined 10% however, they aren’t negligible and currently have a lot of upside potential.
  4. Stocks and bonds returns, at 8% could be the 3rd most important source of gains, if it weren’t for my job’s generous benefits and the largest if I didn’t have a 401k match. The best part of it is that we have complete control over it. If we changed jobs, it wouldn’t change.
  5. House appreciation is last, at a paltry 2%, which supports the fact that investing in your own primary residence isn’t really a path to riches. Unless you live in some of the hottest markets like San Francisco or Denver (and not in Houston), house prices tend to follow the rate of inflation. This explains why there’s such a debate on buying vs renting and why in all case we advocate against buying more house than you need. Real-estate can still be a good investment source, like rental properties, but rarely as a primary residence.

Looking ahead

I’m still a few years out from my Financial Independence Day, but I’ve tried to estimate what this pie will like 5 years from now. By then, it is very possible that the investment portion will increase 10%, to roughly 40% of my overall worth. And the pie will be  significantly larger.

without investments, it takes almost double the time to reach Financial Independence

Put another way, without investments, it would take almost double the time to reach Financial Independence. Think about how powerful that is. You could be saving as much as your neighbor every month, but if you invest and he doesn’t, you could still retire early twice as fast.

Imagine if your neighbor does not invest and does not save. He might not even conceive that early retirement is an option.

Now you know the secrets of the Financial Playbook:

  1. Be mindful of your spending and save as much as you can,
  2. Invest in your company 401k and all the other benefits that you can get,
  3. Invest the rest in low cost index funds like Vanguard,
  4. Don’t waste money buying more house than you need.

Repeat for a few years and your net worth will go through the roof. Enjoy the journey!

-Nick

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12 COMMENTS

  1. Whoa – without investments it takes almost double the time to FI. That’s pretty sobering for those people still squeamish about the stock market. Fortunately, that’s not me and like you, I’d say the majority of our net worth would come from saving and personal investments.

    • Savings are a very powerful way to build wealth, but investments come in at a close second. With the condition they are not sitting on a checking account earning 0.01%. There’s only so much heavy lifting we can do, we have to delegate the rest to our little dollars so they can work on it themselves! 🙂

  2. That’s a nice way to look at your investments, Nick. Mine are still early in their compounding life as well and my contributions account for about 75% of the total. Interesting, huh? That will flip eventually when the compounding really ramps up. Won’t that be nice!?

    • It isn’t very different isn’t it? Our financial paths are probably very similar in many ways GS.
      I also can’t wait for the ratio to flip the other way around, for me it may take another 10 years or so. By then I’m sure I’ll be able to keep growing my income at the same rate, since statistically most people reach peak earnings in their 40s. Maybe that’ll be time for me to start my own business haha.

      • Yeah it does take a while, but it is quite an inflection point for investment growth. Interesting point about peak salary in the 40s…not quite sure I can hold out that long. Early retirement is quite a sounding call for me…I may be retired or partly retired by then…hopefully.

        • The day investments have generated more wealth than salaries, there will probably be little incentive to work for money anyway. That’d be an interesting situation to be in for sure and I’m pretty sure you’ll get there soon.

  3. TRUTH. At the beginning of the journey, it all seems overwhelming. “I need to get to a 70% savings rate YESTERDAY!” but every little bit is a step in the right direction. Luckily, I’ve got no hesitancy about pouring money into stocks… (maybe I should hesitate more?) – so I have investing on my side. I just need to work on upping the principle!

    • Every step is a step in the right direction AND each steps covers more and more ground. It’s not easy and we’re not perfect, but after several years it does add up very nicely.

  4. Inspiring that you’ve been tracking the big picture for so long, Nick. That kind of breakdown and introspection has clearly made in impact on your habits and pursuit of your goals. It’s too bad more people aren’t as deliberate.

    • I’ve come to the conclusion that we can’t change people, or at least that you can’t force people to do things they aren’t interested in.
      Instead we can show the way. With this posted on my little corner of the internet, at least it’s available to anyone who’s slightly interested about FI and wondering how to get there. Thanks for stopping by!

  5. High savings rate – the best advice that I wish people understood. I feel like too many people think that they need to sell a business or have an investment banker’s income to be able to retire early or become a millionaire. They focus too heavily on the income side of the equation and never the expense side of the equation.

    I think the media has a lot to do with it because they don’t really publicize “look how much this guy is saving!” but rather publicize “this guy sold a multi million dollar business and is now retired!”

    • Very good analysis, it’s so true. Saving money is accessible to so many more people, not everyone can run a business and sell it for millions. It isn’t as “newsworthy” but the result is the same and that’s what I wanted to show with this post.
      Thanks for the great feedback!

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