Introduction
This month we hit a huge milestone – our net worth finally crossed $10M! I’ve been looking forward to this day for a few years now. On May 31, 2017 our net worth was 3.56M, and we’ve almost tripled our net worth since then.
I certainly don’t expect another tripling in the next 3 years.
Here’s what our net worth looked like for June:
Our net worth change for the month was +10.1%, which trounced the S&P’s -8.25% return. 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.
We massively outperformed the market this month for a few reasons. The biggest is because I got the large (roughly $800k after taxes) commission check I have been waiting for. In addition, we update the value of our real estate at the end of each quarter – this accounted for $580k of the month’s gain.
Money Commando True Wealth Index
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 quick and dirty 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.
My net worth report above includes an adjustment for the Money Commando True Wealth Index (MCTWI). The MCTWI for June, 2022 is 81%. This indicates that the stock market is likely a bit overvalued.
If the market was suddenly revalued at the long-term average of 15.97x earnings rather than the current 19.71x earnings, then your stock market investments would be worth roughly 81% of what they are currently worth. The recent downturn has caused the stock market to get closer to fair value than it’s been in quite a while
Let’s take a closer look at our assets and liabilities.
Assets
Brokerage (+9.8% Month, +2.9% YTD):
The stock market was down more than 8% but this was more than made up for by the cash from my commission check. Our investments were down about $400,000 but the $780,000 deposit more than made up for it.
Retirement Accounts (-1.5% Month, -15.1% 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 ~40% discount (to account for federal and CA state taxes).
For the year to date our returns are pretty similar to the S&P 500’s returns.
529 accounts (-15.3% Month, -19.6% YTD):
We are contributing $500/month/child into these accounts, and given that our kids are 8 and 6, 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.
The performance this month looks especially bad because our accounts were updating correctly for the last few months.
Checking (+56.9% Month, +102.6% 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 equity: (+0% Month, +0% YTD):
We now have 6 separate private equity investments. Since there’s no way to find the current value of these investments I will continue to keep them valued at my initial investment amount unless/until we are provided information about an updated valuation.
No change this month.
Stock options: (+0% Month, +0% Year)
No change this month.
Rental properties (+7.3% Month, +13.5% YTD):
I update the value of our rental properties at the end of each quarter. We enjoyed a ridiculous run up in property values over the last year or so, and getting another 7.3% in just one quarter almost feels like cheating.
Primary residence (+16.4% Month, +19.6% YTD):
I update the value of our primary residence at the end of each quarter. I don’t really care too much about this value, as we hope to live in this house forever, but it’s better that it’s going up than going down.
I don’t understand how our house could have increased in value by $430k in just 3 months. It’s a bit silly.
Total Assets (+9.0% Month, +6.1% YTD):
I hope to get something around a 1% increase in our assets each month, which would be something a bit north of 12% per year. We are already up by 9% through the first 6 months of the year, so we are looking pretty good right now.
Total assets after adjusting for MCTWI (+9.3% Month, +7.1% YTD):
To get this number I adjust our brokerage, retirement accounts, and 529 accounts based on the MCTWI. Our checking, private equity, stock options, rental properties, and primary residence values are NOT adjusted for the MCTWI.
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 (-40.7% Month, -70.6% 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.
Rental mortgages (-0.2% Month, -2.4% YTD)
We are chipping away at these mortgages, and we’ve been paying off 0.2% – 0.3% 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 (-0.2% Month, -1.2% YTD)
At our insanely low interest rate I don’t see any reason to pay this off early. I expect we’ll hold this mortgage for the next 29+ years.
Total liabilities (-0.4% Month, -2.5% YTD)
Liability reduction is much steadier and more predictable than the increase in the value of our assets. I expect that we are about 20 years away from being debt free (unless we decide to accelerate our payments for some reason).
Total net worth (+10.1% Month, +7.2% YTD)
We finally crossed the $10M threshold! A friend and reader of this blog asked me how we did it, and the answer really isn’t very exciting. I started saving when I was 22 years old. I’ve maxed out my 401k every year since then. I maintained a reasonably high savings rate throughout the years, and I took those savings and put them into blue chip stocks and residential real estate.
I was fortunate to have some of my stock options end up being worth low 6 figures, and I’ve had 3 commission checks that were each > $1M. We saved and invested about 90% of those commission checks.
And for as long as I’ve been looking forward to this date, nothing really has changed. Frankly, I don’t feel any different than I did when we had $3M in net worth 5 years ago. I guess the only real difference is that I probably don’t need to work if I don’t want to, but even with $10M it seems a bit aggressive to stop working.
Our next goal is to hit $120k/year in passive income. After that it’s probably going to be $200k/year in passive income and $15M in net worth. I think at that level I’ll feel comfortable not working.
Conclusion
I’m looking forward to putting some of the commission money to work at today’s lower prices and letting an eventual market rebound drive us up to $11M or even $12M with no additional savings.
How did everybody else do this month? What’s your asset allocation, and how does it compare to your ideal allocation?