In addition to setting goals it is also important to track your progress along the way to accomplishing them. After all if you have a goal that you want to meet by the end of the year and you find out in November that you are way behind on meeting it then you might not have enough time to “adjust fire” and still meet the goal by the end of the year. Essentially you misallocated your resources and were ignorant of that fact until too late! In order to avoid such blunders I will be conducting a net worth analysis on myself at the end of every quarter in addition to a quarterly passive income analysis (which I already covered in my previous post). Future posts will further detail where I want my net worth level to be ten, twenty, and thirty years down the road.
Disclaimer: It might be a by-product of serving in the Army but it is safe to say I have a much different approach to privacy than I did when I was a civilian. I know many Americans are understandably uncomfortable talking about their financial situation (probably a contributor to the nation’s financial issues on both individual and government levels) so broadcasting my worth down to the cent can seem odd and to some even rude. Please understand that this is intended to be a way of keeping me honest: if I say I’m going to increase my worth by X% in three months on this blog I am more likely to hold myself to that goal. In no way is this intended to serve as an ego boost: I want it to serve as a motivator and learning tool for not just me but also anyone who stumbles upon this blog and is also pursuing financial independence.
Now for the fun part: my personal net worth analysis in 30 seconds! I am not counting material possessions like my car (purchased with cash) or my sizeable book collection as assets as I do not view them as liquid or as things that I would willingly part with easily. Thus I am restricting my asset count to only my checking account, savings accounts, CDs (all classified under cash) and my investments. I do not have a house at this time. My only liabilities are credit card debt. I pay my bill off in full every month and never carry a balance so I do not pay interest charges on the debt.
So, without further ado, the net worth breakdown as of September 30th (end of Quarter 3):
ASSETS | |
Cash | $34,281.58 |
Taxable Investments | $25,913.51 |
Roth IRA | $14,840.72 |
Total Assets | $75,035.81 |
LIABILITIES | |
Credit Card Debt | ($970.48) |
Total Liabilities | ($970.48) |
PERSONAL NET WORTH | |
$74,065.33 | |
When I next conduct this analysis at the end of Quarter 4 (ending on December 31st) my goal is to see a 20% growth in overall net worth, making the target value $88,878.40, an increase of $14,813.07. I expect to accomplish this through lower credit card debt (the high total is due to costs associated with me being on leave for two weeks in September), additional contributions to my taxable investments, re-investing dividends, and sticking to my savings plan for long term goals. The direction of the stock market over the next three months will be the major variable in whether or not I can meet my goal. Right now if the stock market ends up returning 0% overall in terms of capital appreciation over the next quarter I will still be able to meet my net worth target for the end of the year. With a little help from the market and finding a few extra dollars to save I have an outside shot of hitting the $100,000 net worth mark by the end of the year. That is going to be my stretch goal for the final quarter of 2011 and will require a 35% increase in net worth. Naturally this is not the kind of increase I can expect to be the norm over the life of my portfolio however while I am deployed I intend to take full advantage of the opportunity provided to me!
Why Discuss Net Worth?
The specific purpose of this blog is to learn about and discuss investing in dividend stocks. I am bringing net worth into the discussion because I view it as an important metric of financial health. I even consider it to be a more important metric than income earned from a job because it is a reflection of how well I save and invest my money as opposed to how well I earn it. Think of it this way: Coca-Cola (KO) earns billions of dollars each year in revenue which it uses to grow itself. Investors see this growth as a sign of a healthy company and purchase shares of ownership in the company in order to take advantage of the capital gains opportunity as well as the dividend payouts. The more Coca-Cola grows the more valuable it becomes to own, and we all want a piece of something with increasing value right? Do you think anyone would really consider Coca-Cola a worthy investment if no matter how much money it earned it never expanded into another market, never spent any more money on advertising than the year before, and never paid dividends? A 0% growth rate, or even worse a negative growth rate, is not attractive to investors (and with no dividend there is virtually no upside to owning part of such a business). We want to partake in ownership of a business that will increase the value of our dollar more than any other possible investments could; 0% growth companies can’t do that!
So the question to ask is this: would you invest in yourself? If my net worth at the end of Quarter 4 is $60,000 despite me contributing say another $15,000 to my investments then I clearly am doing something wrong. If by the end of next year I am worth only $30,000 then I am headed for trouble and I doubt anyone would want to share in my misfortune. Even if I pulled down an annual salary of $75,000 this year and $80,000 next year would that change your mind? I hope not! Despite increasing my income by 6.67% my net worth would have dropped by almost 60%. Clearly I would not have demonstrated any wisdom in using that earned money to create more value in myself.
However suppose I was able to increase my net worth every quarter by say 8%-12%. Would I then seem like an attractive investment? The way the deal would work is that you would give me money in return for the right to claim a percentage of my value and future earnings. As long as my value goes up you make money on your investment. In the same vein I would also invest in myself at the same time through education, looking for additional sources of income, and acquiring additional productive investments for my portfolio. That is the kind of activity I intend to pursue, the end result of which is that my net worth will increase each year. The kicker is that a certain portion of my worth will be committed to investments that pay dividends so that I am able to generate more income simply by having more wealth. I can then re-invest those dividends in myself in order to increase my net worth and in turn receive larger dividend payments, see how this comes full circle? It is a snowball effect: the wealthier you are the faster you can increase that wealth, and by employing that wealth into income generating investments outside of your job you massively increase your financial security without trying to put in more hours at work for only minimal, and diminishing, returns.
Here is another reason why I consider net worth analysis a critical part of an individual’s financial self-assessment: it includes debt and reflects your ability to live below your means. If you are talking to someone at a party and they say that they earn $250,000 a year that certainly sounds impressive but it doesn’t tell you a thing about their financial health. If they say they earn $50,000 a year it also doesn’t tell you a thing about their financial health. The big earner could very well only have a net worth of $50,000 with $25,000 in debt while the smaller earner has a net worth of $250,000 and $5,000 in debt. Both have a debt to income ratio of 10% however their net worth is very different (the debt to capital ratio is more telling than debt to income). Want to take a guess as to who is less concerned about losing their job? From my standpoint I have no interest in owing other people money. In general if you manage your expenses, minimize your debt, and maximize your free cash flow you will have many more opportunities to significantly grow your wealth than someone who spends better than they save and relies too much on debt to make purchases.
The bottom line is this: net worth is more important than income from your job. If you plan to retire at some point in the future then you need to plan on not having income from your job available to you. What you can (and should) do is maximize your net worth in the meantime so that it generates its own income passively at levels that meet your requirements for when you want to enjoy being independent from the labor force. Dividend growth stocks provide an excellent opportunity for achieving that very goal.
Full Disclosure: Long Coca-Cola
Related Post: Book Review: The Millionaire Next Door
Related Post: Financial Advantages of Being Deployed
DIVIDEND NEWS: KIMBERLY PARK (KMB) PAYS QUARTLERLY DIVIDEND
2011 Dividend Tracker (Goal is $200) | |
Quarter 1 (January 1 – March 30) | $3.75 |
Quarter 2 (April 1 – June 30) | $22.47 |
Quarter 3 (July 1 – September 30) | $31.77 |
Quarter 4 (October 1 – December 31) | |
Company | Dividend Payout |
Coca-Cola (October 1st) | $60.33 |
Kimberly Clark (October 4th) | $11.20 |
QUARTER TOTAL | $71.53 |
Year To Date Total | $129.52 |
64.76% of Goal | |
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