This is the second post of a series that will provide regular updates on our personal financial situation and performance. All of the metrics and relevant data points you will see here are things that I have tracked using a combination of Personal Capital and my own spreadsheets for the past 5 years. For privacy reasons, I’m not going to display dollar values, but will show trends and ratios. My hope is that by seeing how I track my own finances, you may get some ideas for how to better track yours. Feedback appreciated, as always!
November was another good month for us financially, although there are a couple of bumps that we’ve experienced and some storm clouds on the horizon. Here are the highlights:
- Maintained a +40% after-tax savings rate incl. dividend reinvestment and employer 401k matches, despite my wife being on maternity leave
- 13.8% growth in net worth over the past 12 months, mostly coming from investment gains
- Asset allocation is within a few percentage points of target, but is going to shift more towards alternatives with recent real estate crowdfunding investments
- Investment performance has started lagging the S&P 500, and I’m not completely sure why
Our income has had a few bumps up and down in the past 12 months as you can see in the following chart:
My income has been pretty consistent over that time, but my wife’s has been variable. She started a new job in March after taking a year off with the birth of our son and moving to a new state. November was her first full month on maternity leave after our daughter was born. She’ll be back in business in January.
The big spike in other income are the huge tax refunds we received after having our earned income drop meaningfully after switching jobs/lifestyles. Significantly higher withholdings than required last year all came back to us. I’d expect this to be minimal go forward.
Passive income are things like dividends, Lending Club earnings (net of write-offs), and real estate crowdfunding investments. I committed an additional slug of money to real estate crowdfunding this month, so expect this income to grow over time as they come online. I’d eventually like to see these reach comparable size as our earned income
Details of how each have changed as well as relative proportions are included below:
While our total income in the past 12 months has grown 4.9% over the last year, you can really see how much the underlying distribution has changed. It’s going to take at least another 6 months for everything to settle out given the magnitude of changes.
12 Month Average After-Tax Savings Rates
It’s not what you earn, it’s what you keep. After-backing out tax withholdings, we have pretty consistently saved around 40% of our earnings, which I’m happy to see we maintained with only one income this month.
The savings rates above are on a rolling 12 month basis, so the big bump up from March to May was a hangover from my higher-paying prior job. I suspect we were able to maintain the ~40% rate since we doubled up 401k contributions for my wife, knowing she’d be out part of this year. All else equal, I’d expect this to drift down to somewhere in the 30% range going forward once we have two daycare bills to pay.
Our other savings during the year are 2017 IRA contributions ($5,500 each) and a little bit of taxable savings when there was an extra paycheck one month. I did make a contribution to our kids’ 529s this month to get a credit on our state tax return as well.
Net Worth Growth
Our net worth grew again in November, continuing the trend we’ve been consistently seeing this year. Once again, thanks, bull market. Given the nest egg we’ve built to date, the market is a bigger influence on our net worth growth as our savings as you’ll see in the next section.
* Total net worth – home/vehicle equity – unvested 401k balances – estimated deferred taxes
** Baseline net worth – 401k/IRA retirement savings – 529 college savings – life insurance cash value – real estate crowdfunding investments
Total net worth is up 13.8% in the last 12 months and 0.9% last month. This number will always trail baseline net worth growth at is includes our house which I value at the lower of our purchase price or market value. Since home equity currently makes up approximately one-third of our total net worth, it acts as a pretty big anchor on growth (by design to be conservative).
Baseline net worth is up 28.5% in the last 12 months and 1.3% last month. This is pretty representative of growth in my investment portfolio, but also recognizes that I’ll have a hefty deferred tax bill due when I ultimately cash in retirement savings. I’ve tried to capture that to be conservative. I also discovered an error in my math that was artificially depressing growth which now has been fixed.
Liquid net worth is down 4.7% in the last 12 months and down 8.1% last month. There was a big spike in the middle of the year when I drew down a portion of our HELOC in anticipation of dipping my toes in some crowdfunding real estate investments. As I made a few investments, the liquid balance went down. I also updated the formula to exclude any of those investments since, by design, they are highly illiquid.
Changes in Net Worth
November of last year was the last month our net worth declined; it’s grown every period since! I look at the source of change three different ways: savings, investment portfolio gains, and all other changes.
Even though we’re saving ~40% of our after-tax income every month, it only contributes about one-quarter of our growth in net worth. It’s both liberating (and a bit depressing) that what we do day-to-day has such a small impact on our overall financial situation.
The main positive driver this month again was investment gains. The market was up again and so were we, but I’ve noticed our performance has started to trail that of the S&P 500. I need to do some more research as to what it is, but my guess is some portion of it is due to me capturing real estate crowdfunding distributions as income vs. investment gains.
The big negative this month was we started to receive all of the big medical bills from my daughter’s birth. I had set aside some money before, but also pulled a bit out of our HSA to cover them as well.
Investment Portfolio Asset Allocation
I track all our investments in Personal Capital which is useful for having asset allocation tracked automatically. Here is our asset allocation in November 2017.
This is pretty close to our target allocation with roughly three-quarters of the portfolio invested in equity index funds. The balance is invested in bond index funds and alternatives (primarily real estate). We don’t own any mutual funds, which helps to keep the overall expense ratio pretty low.
None of these buckets are materially different from our target allocation, so no rebalancing is necessary. Next month will reflect an increased allocation to alternatives from real estate crowdfunding commitments I have made.
In addition to tracking our investment portfolio asset allocation, I also track the distribution by tax status. Our investment portfolio comprises tax-free Roth IRAs, tax-deferred 401k’s and taxable brokerage accounts. This mix doesn’t move around substantially period to period, but I’d expect it to shift slightly more towards tax deferred over time as the biggest category of our savings are 401k contributions. In any case, it’s nice to know I’ll have a number of different drawdown strategies to consider, regardless of where the tax code ends up.
Note: Compared to last month, I decided to rebucket my HSA and 529 college savings as tax free vs. tax deferred since I don’t see a scenario where I wouldn’t be utilizing their full tax benefits.
In addition to tracking trends over time, I also look at a couple of additional ratios that are included below:
I target having 6 months of savings in our emergency fund, which I keep in a taxable account with a more conservative asset allocation (40% stocks / 60% bonds) than the portfolio overall. I currently have about 8 months saved, but expect that to drift down closer to my target once I have the second childcare bill to pay.
Every month I set up an expense accrual for bills that occur irregularly throughout the year, like car insurance, property taxes, etc. When I actually pay the bill, I decrease the liability. The impact of this is to spread the cost over the full year so that my net worth calculation is more stable. At the same time, have a separate bank account that I use to pay for all of those irregular expenses. If the two match, then I’ve covered my exposure for those future obligations.
We currently have an HSA that is massively overfunded relative to our annual deductible and out of pocket maximum. We theoretically could pay 17.8 years of deductible without extinguishing the account. I plan to just let this account ride and will use to pay for healthcare costs way out in the future, but I did draw down some of it this month to pay hospital bills from my daughter’s birth.
The last metrics are simply leverage calculations, or lack of leverage at the moment. Our only liabilities are a HELOC which is drawn to only a 7% LTV, miscellaneous credit cards, and the accruals mentioned above. By not being hardly levered at all, we are in a very strong position for weathering the next downturn. I do expect this to tick up a bit since I plan on drawing the HELOC for some upcoming real estate crowdfunding investments.
Overall, I’m happy but not thrilled with our financial performance this past month, although I think that’s just because of expectations. Everything has been going up for so long and so consistently, it’s tough to not compare yourself against that.
I am concerned about some things that will likely play out over the next couple of months, most importantly how our spending and savings will flex once my wife goes back to work and we have another childcare bill. I’m not certain how those changes will impact my FI metrics. I’m hoping it doesn’t set us back too much, but at least we won’t be paying those bills forever.
I hope you all have a happy holiday season!
John started Present Value Finance in 2017 to share his experiences and insights on personal finance to help people make better decisions and take control of their financial lives.
He achieved financial independence in 2016 by walking away from the high stress world of corporate finance to focus on his family. He’s a husband, father, family CFO, and all around finance geek.