Net Worth Challenge

After reading several other personal finance blogs, I feel like I dodged a bullet in June. Many of my fellow bloggers reported net worth losses or simply break-even numbers. I feel lucky to be reporting a gain of $6,181.91 for the month; an increase of 3.54% to our net worth. It was business as usual for my wife and I during the month. I’m not reporting a drastic increase in expenses — and there is no increase in income during June.

Now July will be a slightly different story. I reported in my last post that I received a nice raise at work! I was hoping for a modest raise of 5% that would out-pace the rate of inflation, but I was given much, much more. While unexpected, the extra income will certainly be welcome. It didn’t take effect in June, but I will see the increase in my July paycheck. As a result, I went ahead and made an update to our 2007 financial goals, upping our end-of-year net worth goal.

I’m anxious to see how July will pan out.  But for now, here is the June 2007 update:

I recently went through my annual review at the office.  I always seem to get very anxious and worried leading up to my review.  It’s not that I have anything to really be worried about, but rather, I just fear that unknown.  I know I’m doing a great job in my position at work, both professionally and personally.  But that still doesn’t stop me from worrying about the review and worrying if those around me value my presence and contributions at the work-place.

For the second year in a row, though, my worries have been put to rest!  I received the highest marks in all measured categories (ok, I have to boast a bit) — and my boss has been very pleased with all areas of my work.  At last year’s annual review, I was promoted into a leadership position within my department and was given a sizable raise in pay.  While a new promotion is not in the cards this year, another sizable increase in my salary is coming my way.  Just like last year, the increase was much larger than I could ever have expected.

It does make me feel good that I am appreciated at work and that my contributions are being recognized.  The salary increase was a nice bonus and a great cap to another wonderful year at my company.  Of course, after getting home and sharing the good news with my wife, my mind naturally switches over the question — “now what should we do with this additional money?”  My wife and I were not expecting the increase that I was given; and so we have decided to put most of it away into our investments.  The types of investment category (retirement or non-retirement) has yet to be determined, as I will be taking a little time to analyze the tax implications of the new salary.  I suspect that we’ll move to maximize our 401k contributions in order to reduce our tax burden  at the end of the year.  But that has yet to be determined.  For now, I’m just enjoying my status on “cloud nine!”

In the past I would typically balance out my Roth IRA contributions throughout the entire year. I would start the New Year by seeing what the maximum allowable contribution would be for the entire year and divide it by 12 to determine my monthly contribution amount. For instance, in 2007 this would mean:

• $4,000 / 12 = $333.33 per month

However, I’m taking a different approach this year by attempting to make my contributions earlier. I am bullish on 2007 and believe the market has no place to go but up. Plus, I have a large reserve of cash sitting in my money market account at Vanguard, which I believe could be put to good use through this plan.

Now some of you are thinking, “wait a minute, what would it mean if you were bearish on the market instead?” Regardless of what I think the market will do in a given year, I will always contribute the maximum allowable amount into my Roth IRA (and my wife’s Roth IRA) for the year. But if I were bearish in a given year, I would follow the plan of balanced contributions for the year (ie, $333.33 into my Roth IRA each month).

With that explanation said, I made a $1,700 contribution last Tuesday into my Roth IRA account for 2007. I have not yet made a contribution into my wife’s account, but I expect to in the middle of this week. The maximum allowable contribution into a Roth IRA (if you meet the IRS income requirements) for 2007 is $4,000. With my contribution from Tuesday into my Roth IRA account, this means I can still put in $2,300 for tax year 2007. I can also put in $4,000 into my wife’s Roth IRA account for tax year 2007.

Last year we were able to finish on a nice high note, ending the year with a net worth of $137,960.77. We accomplished all but one of our 2006 goals, which I still consider to be a great success. I’ll talk about the goal that we didn’t make a little later (it regards an emergency cash fund) in a future post. Looking ahead in 2007, these are the goals that my wife and I are going to strive to achieve:

We want to continue the momentum of savings and accumulation from 2006 leading into this New Year. In 2007, our goal will remain to continue improving our financial foundation using the plan we put in place in June 2005. Specifically, this year we are hoping to:

• Make the maximum allowed contributions to our Roth IRAs held at Vanguard as we’ve done in the past. This means putting in $4,000 for my Roth IRA and $3,000 for my wife’s Roth IRA. My wife’s goal is less because her grandparents made a generous gift of $1,000 during Christmas-time (directed toward 2007 tax year) into her Roth IRA account held at Ameriprise.
  06/15/2007 - Goal completed early.

• Contribute into both of our company 401K plans in order to get, at the very least, the matching amount. The goal is to contribute at least $6,170 for my 401K and at least $7,650 for my wife’s 401K.
  Contribute as much as allowed (by law and by our companies) into both of our company 401k plans. The goal is to contribute the maximum allowable amount of $15,500 for my 401k and at least $9,000 for my wife’s 401k (her contributions are limited by company policy).
  07/09/2007 - Increased goal because of raise at work and tax implications related to raise.

• Contribute $1,000 per month into our general investment account at Ameritrade and Sharebuilder. The majority of the money will be invested in small-cap companies each month, in an attempt to balance out the large- and mid-cap focus in our Vanguard accounts. The goal is to save $12,000 for the year in our general investment account, bringing the total amount in this account up to $42,000.

• Continue saving $1,000 per month into our “Future House Fund” currently held at Vanguard. The goal is to save $12,000 for this year for this purpose, bringing the total amount in this account up to $48,000 $28,000.
  04/01/2007 - The amount per month won’t change, but had to lower total amount goal because of rental property purchase in March.

• Reach a net worth of $225,000 $210,000 by year end.
  07/09/2007 - Increased goal because of raise at work.

I hope everyone has a Happy (and prosperous) New Year in 2007.  We have officially wrapped up 2006 and now it is time to move forward into the future.

I took a little bit of a break in December 2006 —- but don’t worry, I’ll be back in full force this month.  I need to catch everyone up with an update to last month’s net worth and a quick snapshot of where I’m at at the beginning of 2007.  But for now, catch up on that sleep you missed from last night and enjoy this wonderful January 1st day.  I’ll be in front of the TV watching some great football; starting with the Rose Bowl!

There are a lot of people that dislike the thought of having liabilities and owing money to someone (or some company) — my wife is one of them. Her thoughts about liabilities are probably very common with many other people in society. Her philosophy on loans is to pay them back as quick as possible and pay as little interest as possible. In short, she is scared of liabilities.

I do not follow this train of thought, even though it was taught to me by family and friends. Instead, I try and maximize the gain to my net worth by utilizing liabilities in the most efficient ways possible. If you refer back to our current financial situation in October, you’ll probably notice that my wife and I have a sizeable chunk of money in our taxable brokerage accounts. This money could be used to pay down many of our liabilities (ie, house mortgage) very quickly, but this action would actually hurt us more than help us in the long-run. Since this post is merely explaining the liabilities I do have, I’ll have to save the discussion about my “liability strategies” for another day (but I did want to briefly introduce the fact that I have a strategy).

Below are the liability accounts that we had for the month ending September 2006 and an explanation of what each line-item represents.

Credit Card Balances - At the end of every month we pay our credit card balances in full. In the past I did “float” some money by carrying a balance on 0% interest credit cards and kept the money in an interest-earning money market account. However, since my wife and I are looking into purchasing a new home in the near future, I thought it best to maximize our FICO credit score and get rid of those balances. So now the only reason this item exists is because until a bill is received for our monthly purchases, a payment will not be made (we want to maximize our reward points). Due to the timing of receiving bills and the end of a month, small balances may get listed in this item. We will pay the balance in full when a bill is received, though.

House #1 Mortgage - We have a 30-year fixed rate mortgage on our duplex with a rate of 5.5%. At the time of purchase, my wife and I put down a 20% down payment on the home. Each month we only pay the principal and interest that is required by the bank and nothing more. Instead of paying more on the loan, I put a little extra money each month in our money market account. This money gets marked as “home mortgage prepayment fund” in that money market account and will eventually be used to make payments on the home mortgage —- but that time is far, far into the future.

Student Loan - I suppose a better title for this item would be student loans, since both my wife still owe money for our college education. Our education was worth every penny and has certainly given us a career boost and pay boost now that we’re in the “real world.” My wife’s student loan balance has a fixed rate of 2.875% and my student loan has a fixed rate of 1.875%. Since these liabilities have such a low rate, it makes economic sense for us to only make the minimum principal and interest payments each month. As with our home mortgage, I also set aside an extra bit of money each month into our money-market account. This money gets marked as “student loan prepayment fund” and will eventually be used to make payments on our student loans — again, this will be far, far in the future.

General Loan - This is an item for which I claim responsibility, because it predates my wife completely. I have a “general loan” from my grandparents that was used for various items several years ago. Right now my rate on this loan is 0% and there is no specified final payment date. Since I do not have to pay interest on this loan — there really is no benefit to me paying off this loan entirely. This is where my conscience sets in, because it is money that I owe my grandparents. I feel guilty not making payments, especially since this is family and they did offer me a great loan when I needed it (the word “need” could be debated). Therefore, I am making payments on this loan each and every month. I’m not sending large payments, but it is just enough to establish that I am making “good” on my debt obligation.

Other Liabilities - Along with my mortgage payment (princial and interest) each month, I also set aside money for home insurance and property taxes. I do not have the bank keeping this money in escrow for me, so it is my own responsibility to make these payments when the appropriate payment date comes up. So the money I set aside gets put into our money market account and gets marked for the appropriate category. While the money is held in our money market account (which is an asset), I still recognize that these bills will be due at some point in year. Therefore, these items need to be correctly tracked as liabilities — and this item on the liability list is used for that purpose. There are some additional categories that fit in this item besides home insurance and property taxes. In total, this item contains several categories: duplex tenant security deposits, home insurance fund, car insurance fund, and property taxes fund.

Well that’s it for our liabilties. While I look forward to seeing these amounts decrease each and every month, I’m not that worried to be carrying liabilities in the first place. All of these liabilities were thought out before we incurred them (well, perhaps not the General Loan) and we have a plan for meeting these debt obligations in the future.

After graduating college, my wife and I wanted to get a good start in building our “financial foundation.” Both of us had been good savers in college and we planned on continuing our savings habits after starting our new jobs. I’ll admit it was tough to resist the temptation to spend our larger, post-college, real-job paychecks at first — and instead devote a large chunk of our new income to items such as retirement and other long-term savings goals. But after a short while we both became used to the new savings habits and started realizing how much it would help us in the future. Flash forward two years and it seems that our asset accounts are growing and the plan we created is working well for us.

In the last post I listed these asset accounts along with our liability accounts for the month ending September 2006. Now I would like to dive a little deeper and explain what each line-item represents:

Cash & Savings - The main account I use as a “starting point” for all my financial activities is my checking account. I use this account for direct deposit of paychecks, paying credit card bills, writing checks, and moving money from my different investment accounts. In addition to a checking account, I also maintain a savings account at the same bank. I only keep the bare minimum in the savings account because I can get a higher rate of return elsewhere. I also have a PayPal account for accepting online payments. This account usually has a small balance in it that I periodically transfer into my checking account. Finally, I also keep track of the money I carry around in my wallet (and the money in my wife’s purse). Although the amounts of cash in our wallet and purse are usually small, I still like to track it so that we know exactly where our money gets spent. Overall, I try and manage the balances in our checking, savings, PayPal, and wallet accounts so that only a bare minimum is stored here. Since I can earn a higher rate of return in a money market account, I generally store more money there and less money in the Cash & Savings accounts.

Taxable Brokerage Accounts - This item is comprised of my non-retirement Ameritrade, Sharebuilder and Vanguard accounts. I use the Ameritrade and Sharebuilder accounts for trading stocks, ETFs, and options contracts. I use both accounts because each one has an advantage that I try and utilize as best as possible. The Ameritrade account has lower commission charges and gets used for trading options contracts and for purchasing stocks that do not pay a dividend. The Sharebuilder account gets used for purchasing stocks that pay a dividend, since they offer dividend reinvestment for free. I try to set aside some money each month for investing in the stock market, which is separate from my retirement savings. As of lately, much of my investing in these accounts has been in small-cap and mid-cap stocks. I have been investing in these categories in order to better diversify my overall investment holdings. I also maintain a Vanguard account for short-term and long-term purposes. Instead of storing short-term money in my checking account, I keep this money in a Vanguard money market account. My money market fund at Vanguard holds money for items such as our vacation fund, home insurance fund, car insurance fund, property tax fund, and other such items. I also use Vanguard to purchase mutual funds for longer-term goals. Our house fund is invested in a mutual fund that is riskier, but typically has a higher rate of return than the money market account.

Roth IRA - Although I did not start my Roth IRA account at age 18, the first year available for me to join, I did start at a reasonably young age. My goal has always been to contribute the maximum allowable amount into my Roth IRA each year. When my wife and I were married, I was quick to setup an account for her and began contributing the maximum amount for her as well. I consider investing in our Roth IRA a high-priority. Both of these accounts are held at Vanguard and are invested in Vanguard mutual funds.

401(k) - My wife and I have 401k accounts at both our companies. We setup these accounts as soon as we began our full-time jobs and began contributing money into these accounts from day one. At the bare minimum, our goal has always been to contribute enough so that we earn the maximum matching amount from our companies. Lately, however, we have been putting away much more into these accounts because of tax planning. Because of tax planning, I hope to contribute the maximum allowable amount ($15,000) in my 401K this year. I would like to do the same with my wife’s 401K account, but her company has a limitation on her contribution rate. Therefore, it is impossible for us to contribute the maximum allowable amount for her account while she is at her present employer.

House #1 - Rental/Primary - In addition to starting our savings for retirement when we began working full-time, we also purchased a home shortly after graduating from college. We did not go the traditional route, however, and instead purchased a duplex with the intention of living in one side and renting the other side out. Now that we have lived there for a little over two years, we may start searching for a new home next Spring. We plan on keeping this duplex for many more years and will rent out the side we had been living in after moving to a new home.

Other Assets - The only assets this item currently tracks is the value of our two vehicles. While our cars may not be easily convertable to cash in the future, they are still considered assets and I do feel they should be included. I used the Kelley Blue Book website to determine the fair market value of our cars at the end of last year. I do not plan on making changes to the value of our cars on an ongoing basis each month, but rather once a year at the end of December.

Overall, I am proud of the values of each asset account because it represents progress that my wife and I have been making over the past two years. Believe me, they didn’t automatically start out looking so strong. It will be exciting for me to track the progress of these accounts in the future and to talk about strategies for maximizing the rate of return I am earning on these accounts.

Although I am just starting out with this blog, I am not just starting out with my plans to grow my net worth. In my last post I talked about the long-term goals I have set — in reality, I set these goals about two years ago. Since that time I have been trying to alter my saving/spending habits in such a way that I am able to move forward towards those goals.

Starting today, I will begin each month by listing my updated assets, liabilities, and net worth. This accomplishes two things in my mind: (1) it will give you a chance to see where I am at financially in relationship to my goals and (2) it will force me to make this calculation each and every month. And thankfully, it just so happens that I was able to finish totaling up my assets and liabilities today! Here is my current financial situation:

At the end of September 2006, my net worth was $107,674.19. In the next couple of posts I hope to dive deeper into each category and explain the numbers further.

In so many areas of life it makes sense to set goals and create plans that work towards those goals — and the area of personal finance is no different. Although sitting down and setting a goal (and making a plan) may sound like a lot of work, it truly is a HUGE weight off one’s shoulders when completed. I have my own personal financial goals written down on paper as well as yearly mini-goals that I hope to achieve. Eventually, I will share these mini-goals when the time is right. But, in the spirit of getting started and ’setting the goal,’ here are my personal financial goals that I hope to be held accountable for on this blog:

• Accumulate a net worth of $2.5 million (in 2006 dollars) by retirement
• Be able to pull $60,000 per year (in 2006 dollars) from savings at retirement without depleting capital.
• Have the ability to be able to retire between the age of 40 and 50.

Does it seem simple enough? I am dreaming big with these goals, but I do believe with the right plan and resolve these goals are within reach! Setting these goals may be simple, but coming up with a plan with be the challenge — and I’ll save that for another post.

For many years I have wanted to write down my thoughts about finance and money. There are some people in this word that enjoy the topic of money - they enjoy thinking about, planning, managing, strategizing, and growing their money balance. I am one of those people. I find true enjoyment in studying money and working with money. I am excited to be sharing my thoughts about these topics and many others here at NetWorthChallenge.com!

As part of the FIRST POST on the site, I want to start out by thanking both the present and future visitors of this blog. I look forward to discussing different issues related to personal finance, savings, investing, and real estate in the near future. Together we can set financial goals and discover strategies that will help us reach those goals. NetWorthChallenge.com is the start of what I hope will be a valuable resource for individuals that want to learn more about saving, spending, and investing.