(I’m running a bit behind on my monthly updates, so please bear with me as I get caught up over the next few days.)
Each month I publish our net worth on this blog. The reason for making our net worth public is to not only hold myself accountable, but to provide a record so I can review my progress over time. I’ll give a brief analysis on our results for the month and discuss any changes I’m thinking of making.
I track our net worth in both the “real” numbers and the Money Commando True Wealth Index (or MCTWI for short). The MCTWI is a way to provide a more stable and “true” valuation of the stock market by adjusting for valuation (that is, PE ratios that are higher or lower than the long-term market average). As a reminder – the MCTWI tells you how much your stock investments would be worth assuming “normal” valuation rather than the current valuation in the market.
The net worth report below includes an adjustment for the Money Commando True Wealth Index (MCTWI). The MCTWI for August, 2020 is 54%.
If the market was suddenly revalued at the long-term average of 15.82x earnings rather than the current 29.16x earnings, then your stock market investments would be worth roughly 54% of what they are currently worth.
I think this point bears repeating – the US stock market appears to be extremely overvalued based on PE ratios, especially when you consider the potential impact of COVID-19.
Without further ado, here is our net worth report for August, 2020:
Our net worth for the month was up 3.6%, which underperformed the S&P’s return of 7.9%. Our mix of cash, real estate, and equities means that our performance should be less volatile than the stock market – we should underperform when markets are up but outperform when markets are down.
Let’s take a closer look at our assets and liabilities.
Assets
Brokerage (+7.2% Month, +2.9% YTD):
Well, we’ve officially fully recovered from the downturn in March and our brokerage accounts are up for the year by about $90k. Sweet!
Retirement Accounts (+1.2% Month, +0.2% YTD)
This includes a 401(k), two IRAs, and two Roth IRAs (one of each for my wife and me). The only account we are currently contributing to is the 401(k), as we aren’t eligible to continue to the IRAs.
Of course, any withdrawals from these accounts will be taxed at our marginal income tax rate, which means we should probably be valuing these accounts at a ~30% discount.
Our retirement accounts are now up for the year as well, although trailing the S&P 500. This is likely due to our asset allocation – we have a fair amount of money invested outside the US in our retirement accounts.
529 accounts (+8.6% Month, +23.7% YTD):
We are contributing $500/month/child into these accounts, and given that our kids are 6 and 4, we are approaching the point where we have enough money in these accounts and it will make sense to stop contributing.
Assuming both of our kids go to college, both accounts will be completely liquidated in about 20 years. Based on my calculations, these accounts should pay for 90%+ of the total 4-year cost at a state university. The remaining amounts will be paid out of our then-current cash flow.
Checking (-5.8% Month, +156.1% YTD):
Our goal is to keep about $50k in cash in our checking account. This is due to an abundance of caution. I work in an inherently unstable field (sales) and my income varies widely from month to month. Keeping a good chunk of cash in our checking account helps me sleep well at night.
Private investments: unchanged
We have 2 separate private equity investments. Since there’s no way to value these investments I will continue to keep them valued at my initial investment amount.
I’ve heard that there might be a liquidity event for one of my private equity investments later this year. It’s nothing other than a rumor at this point, so I’m not going to adjust my valuation until it becomes real.
Stock options: (+0% Month, +69.2% Year)
These options vest quarterly and a new block of stock vested on July 1st. I’m valuing my stock options at the price used for the most recent liquidity event. This block of options has a strike price substantially higher than my previous blocks of options, which means the valuation is lower (this block was worth $6,125 and the previous 4 blocks were worth $11,375 each.
The next block of options will vest on Oct 1, 2020.
Rental properties (+0% Month, +4.4% YTD):
We update the value of our rental properties at the end of each quarter.
No update this month.
Primary residence (+0% Month, +4.8% YTD):
We update the value of our primary residence at the end of each quarter.
No update this month.
Total Assets (+3.0% Month, +4.1% YTD):
Our assets are up about $307k in 2020. Sweet.
Total assets after adjusting for MCTWI (+2.2% Month, +4.6% YTD):
This is a better indicator of our performance, as it backs out the effect of changes in stock market valuation.
Liabilities
Just a note on the numbers below – since these are liabilities, a negative number (reduction in liability) is good, while a positive number (and increase in liabilities) is bad.
Credit cards (–% Month, -33.5% YTD)
We pay our balances in full each month, so the ebb and flow of our balance is more reflective of when our payment is made than anything else.
The comparison to last month doesn’t make sense, as we had a credit last month and we have a balance this month.
Rental mortgages (-0.2% Month, -2.1% YTD)
We are chipping away at these mortgages, and we’ve been paying off about 0.2% of the balance each month.
At the rate we are paying off our mortgages we are 20+ years from retiring these loans.
Primary residence mortgage (-0% Month, -1.4% YTD)
Our loan has been sold, and during the transfer I can’t access our account. We did make a payment, but my mortgage lender doesn’t provide paper statements, so I don’t have the updated balance.
Total liabilities (+0.2% Month, -1.9% YTD)
The balance on our credit card went up by more than the loans were paid down, resulting in an increase in our total liabilities.
Total net worth (+3.6% Month, +5.3% YTD)
Our net worth was up $228k for the month and $331k for the year. Awesome.
Conclusion
Nothing too exciting this month – just watching our investments slowly increase in value.
Our total net worth is about $6.6M. It’s very possible that we can hit $7M by the end of the year.
How did everybody else do this month? What’s your asset allocation, and how does it compare to your ideal allocation?
$7M by yearend…Dang!!!
I’m trying to chase you to the $10M finish line. I’m only $4.4M behind.
What kinds of moves if any to you make to minimize taxes in large income years?
I’ve now got a few at my disposal but always interested to hear what others are doing to minimize taxes.
Given the success of the business you founded, I have no doubt that you’ll beat us to the $10M finish line! I am hoping to get another big commission check in 2022, and that will get us about halfway from $7M to $10M, but that last $1.5M is a big number!
I have not found any useful ways to reduce our taxes in the big income years, but it’s not for lack of trying. We are at a disadvantage in that all of the income is earned income from my job, which means there’s no good way to spread the income out across multiple years.
We could of course reduce our taxes through charitable donations, setting up a donor advised fund, etc. but that’s not really reducing taxes as much as reducing how much money we keep (although totally valid if donating to charity were a goal we were trying to hit).
I’m thinking about talking to an accountant next year just to see if anything has changed in the last 5 years that would give us the opportunity to reduce our taxes. I talked to one in 2016 (the year before our last big income year) and he agreed there was nothing we could do.