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.
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:
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?
- 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.
- 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.
- 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.
- 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.
- 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.
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:
- Be mindful of your spending and save as much as you can,
- Invest in your company 401k and all the other benefits that you can get,
- Invest the rest in low cost index funds like Vanguard,
- 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!