Lets start with what most people care about!
Net worth is calculated as your assets (things you own) minus the liabilities (what you still owe on it) This means if you purchase a home worth $300,000 and have a $240,000 loan amount and own nothing else of value and have no other debt – your net worth is $60,000.
The graph below shows my own net worth since 2010 (about the time I graduated college) until now.
No Data Found
Lets talk about what we are seeing and why its set up this way.
I wanted to have the graph go back to around the start of my working career in order to help show how things started slowly in the beginning. However, there are not any records from that time left around my house, nor does any online source provide me access to the data from that far back. The result, is that I needed to guess-timate some of this.
I remember starting my job with only a few thousand in my bank account, and within 2 years saved enough for a 20% down payment on my first home, which took nearly every ounce of my savings. Knowing my approximate starting and ending dollar values, this means the first 2 years represent what would have been my savings rate averaged over approximately 24 months and explains why it goes up at a seemly constant rate.
Once purchased, my first home represents the first big liability jump in this graph. The second is actually a combination of two separate rental properties purchased as a package deal. Other than the mortgages, I have never held any other form of debt. No consumer debt, no car debt, nothing.
How does this break down? The chart above helps to show what makes up my total net worth.
There is a lot going on here so lets break it down into what I am considering 6 main sections
- Primary Home
- Rentals
- 401K
- Taxable Brokerage
- HSA (Health Savings Account)
- Cash
Primary Home
I purchased an existing home (not a new build) in an area about 15-20 minutes drive from my work. While a shorter commute was a top priority of mine, my other more naive line of thinking was that “Over enough time, real estate prices will go up, and if the value increases by say 25%, I’d rather have something worth $300K go up 25% vs. something worth $100K go up 25%”.
Essentially: I tried to buy the largest house I could afford thinking it was a good investment to maximize my long term return.
In light of the nearly meteoric housing rises after the pandemic, and with the benefit of hindsight, I think this line of thinking was wrong yet through sheer luck still worked out in my favor. It is not worth detailing it all here, there is another post for that another day, but for now it could best be summarized as: I no longer believe “buy the biggest house you can afford” but in hindsight would purchased something smaller, with more land, and no HOA’s if my goal was FIRE.
Still, the house today is now one of my largest assets and has allowed my “lifestyle inflation” to swell accordingly. I’ve made enough where I would owe taxes if I sell and the realtor fees would also take a significant chunk of change so its not clear at the time of this writing what the long term will be for it.
The Rentals
First things first – I ‘Forrest Gumped’ the rentals. For those missing the reference, I made a decision to enter the rental market based on good intentions, but with naive notions and a shaky foundation of how it works. Over the years I’ve learned quite a bit, and through a bit more sheer luck, not only did I not lose my shirt, but actually managed to come out quite ahead.
Growing up my parents had properties they rented, so that background steered my thinking of simply owning some were a good long term investment. The logic and mindset I used to justify their purchase was a common fallacy – you buy the property and the tenants pay the mortgage, and the rest goes into your bank account. Couldn’t be simpler!
Through a connection from my realtor I was put in touch with another landlord looking to get out of the area rather soon, and was willing to work out a deal if I purchased more than one. Fast forward a month later and I plopped down enough for a 20% deposit for each and was dubbed a landlord.
Reality set me straight very quickly. Again, expounding on the multiple observations I’ve made and lessons learned is an entire post in itself so for this section I will summarize a few key findings.
Originally the plan was to load up on rentals to provide passive income in FIRE. There was a very tangible feeling to see the regular rent income that could provide a nice living. The math seemed easy too – If you want $5000 a month, and the average rental provides $1000, you need a total of 5. Having that clear, measurable goal post worked well for planning and personal motivation.
What you don’t plan for as a newbie is the tenants who stop paying, the evictions, the rehabs, the repairs, and all the extra costs associated with running this as a business. Add on top the “you’re on your own” pat on the back from the government regarding eviction and rent laws during the pandemic when it comes to (lack of) supporting landlords, I was forced to re-evaluate my long-term plans here.
All-in-all, being in a hot, growing market helped me more than anything else. The properties themselves are worth more than 2x now than what I paid for them and the rent as increased on a similar front while most of the traditional expenses remained the same. However if doing it all over again, there is much I would do differently.
401K
You may notice this value seems to start incredibly high. The decision to track my net worth did not come until many years after I had been contributing, so this value represents known numbers based on what I have been able to find in old account statements or from online sources.
My 401K contributions started soon after I started working and I believe I contributed around 8% of my total pay at first. This was designed to max out the companies 4.5% match, and give me something a bit extra without taking too much of my spending money away.
When you are in your early 20s, it is a difficult mental challenge to increase this contribution value, even more so when you see the bite it takes from your paycheck. Retirement seems like a lifetime away and all you have is time, and a lot more pressing needs that require cash now.
Originally it was invested in a dated life-path index fund for a traditional retirement year (30+ years), its now entirely in stock based index funds. I’ve adjusted my contributions in recent years to max out my contributions rather early (sometimes having it fully funded by the end of March or beginning of April) with the vain hope that more time in the market may work in my favor.
I’ve never pulled from or taken a loan against my 401K. Other than some rare moves between different index funds its largely on “set it and forget it”.
Taxable Brokerage
Like my 401K, the brokerage account is limited in how far back I can pull numbers from, however I can approximate its value and usage to help fill some things out.
The account would have been started in 2010 or 2011 as a place to store my employee purchased stock, aka ESPP. At first it was used like a savings account to help with my initial home purchase. I’d get some stock, wait a bit for it to go up, and sell it for more of a profit to lock in the cash. Not the most wise strategy, but again luck was on my side.
One lesson about not buying individual stocks was learned. Like many my age at that time, I was confident I saw a pattern in the stock market I could exploit and double down on some single company stocks in order to hasten my savings rate. Fortunately I only lost a few thousand dollars and it was learned at an early point in my investing career not to invest what I am not willing to lose.
All my stock awards and stock based bonuses went into this account. I sold most of my holdings to buy the first two rentals which explains the first dip. As it grew over the next few years my rental property ‘lessons learned’ told me I should put down at least 50%, ideally 100% for the next rental purchase given my aversion for additional debt, and wanting my cash flow to have a lower margin in favor of more $ in my pocket each month.
Generally speaking over the past 10 years this held a lot of my company stock and large-cap growth index funds. At the same time my cash bonuses were slowly building my checking account as I scouted for my 3rd rental property which I planned to purchase with cash.
Lets talk about the sudden spike in March of 2020. It starts when I made an all-cash offer on a property that fell though around December of 2019. With that sort of money just lying around, I decided to sit on it thinking a new property deal was sure to come along. Fast forward a few months and we all know what happened in March of 2020. The way I saw it, the market tanked over just a few days, and I was sitting on over $100K in cash that was unexpectedly sold at a high.
I took the gamble, and put around $70,000 in a few single company stocks that were hit the hardest and $20,000 in index funds. My thinking was this was an opportunity to buy a significant ‘dip’ in the market and so far its been going well. However, I still regularly contribute part of every paycheck to this account which helped fuel growth as well during the pandemic.
Fast forward a few years, those single company stock gambles did well (even though I am not really a fan of single stock investing – perhaps this shows that I too am not infallible to my own advice?).
The next big spike in Nov of 2023 represents my selling off various stocks and index funds to pay for Valkyrie in cash.
The Health Savings Account (HSA)
Triple Tax Advantaged – That is the biggest benefit of the HSA. This one is slow to grow to significant numbers, but only because you are limited in how much you can contribute to it each year, around $3800 at the time of this writing for a single individual.
The power of this is not just for paying for medial expenses throughout the year, but instead gives you a potentially very powerful FIRE tool to fund the lifestyle.
Starting with the tax advantage. First, any money you contribute is tax deductible. Second, growth in the account is tax free (your excess/unused principle can be invested). Third, you can pull money out of the account (for qualified medical expenses) tax free.
This is an extremely rare trio, so contributions are limited to prevent people from using it for other things.
My strategy has been to contribute the maximum amount to this account and pay for medical expenses out of pocket (you can pay yourself back from the account at a later date if desired). Nearly all of it is invested in the market in an S&P 500 type index fund to try and maximize its long term growth.
If I were to leave my job, I would lose my healthcare and need to purchase a plan from the open market. This is not a cheap purchase in the US, but does qualify as a valid expense to pull from this account.
Estimates are you can safely pull around 4% from a diverse stock portfolio with a 90+ percent chance or better you will not run out of money and it would still grow relative to inflation. Hypothetically speaking, if my own healthcare coverage runs me $5,000 a year, that means I would need $125,000 in the account to perpetually pay for it and its all tax-free.
Cash
Cash is King – or at least that is what some people say. My own relationship has been more complicated. Over the past decade (and more so in the past couple years) anyone who kept cash missed out on one of the longest bull-market runs in stock market history. Couple that with record low interest rates, soaring inflation, and a host of other factors and it does not seem surprising that so many people were encouraged towards using any monetary leverage available to them.
Keeping a 3-6 month safety net of cash was a strategy that followed me through the years. Although with my cost of living this likely puts me in the 6-12 month rage, my concern was always that Murphys Law would kick in and if I lost my job the AC, roof, or something catastrophically expensive would fail requiring a significant amount of capital to address.
Fortunately none of this has happened, but the peace of mind is worth it for me knowing I can easily last several months in the event of the winds of fate turning against me.
Breakdown
The breakdown above shows how this plays out proportionally. As some assets tend to rise and fall dramatically over the course of months or just a few years, I am not focused on trying to re-balance anything at this stage. As long as I am roughly 50/50 between real-estate and the stock market that is comfortable for me.
So whats my end goal? It’s shifted as time went on. Something about reaching your goal and then looking back makes you think “I can wait a bit more, it can get a bit higher”.
It started at $2.5 million. The thought was this gives me around $500,000 or less for a primary home, with the remaining $2,000,000 for investments, which (thanks to the 4% rule) should provide around $80,000 of passive income per year on top of what I may make doing various side hustles. After all – the RE in FIRE for me represents “Recreational Employment” rather than “Retire Early”.
After exploring the cost of healthcare if I had to purchase it on my own, and considering my lifestyle, inflation, and desire to keep both my home and my boat, that increases base costs, which means its not exactly the same math I started with.
Now – I no longer have a hard number, but instead want to see what my income costs will be, and just have something to match it, possibly doing some side hustle. I’ve got a job that pays well above what most people make, so I think this is going to be worth milking for a while and starting to push some boundaries to see if I can make the boat part of the lifestyle, rather than abandoning it for further career opportunities.