Tuesday, April 23, 2013

Change in Networth: Were you down because you weren't a millionaire?

As I logged into google finance I saw an article by the Washington Post titled: Change In Worth by Household Category.  It basically shows how household's net worth values have changed from 2009 to 2011 for the worst (aside from the top net worth group of 1/2 million +).

I don't know about you, but I was definitely in the bottom category of "negative to zero" net worth.  Although I don't have the numbers to back it up, I don't think my net worth was decreasing like the average household.  This highlights the importance of keeping track of your financial health to gauge how you are doing over time.  The first month I documented my net worth was in Jan 2011, I had -$531.06.

Until that time, I figured I was doing pretty good.  I had a couple rental properties and have always watched my spending, but debt was piling up and I realized I was under-water.  I can assure you, that January 2011 was the only month I have had a negative net worth since tracking it.

I personally believe net worth for most households is directly tied to the home itself.  And the only ones who actually engage in diversification are the higher net worth households.  Which may explain why they are the only category that saw a gain from 2009-2011 after the housing crisis.

How did you do from 2009-2011?  If you don't know, you should begin tracking your net worth today.  If you don't like spreadsheets you can log into mint.com and it will do it for you for free.  Its great!

Sunday, April 14, 2013

Pay off the Mortgage or Invest in the Market?

What do I do with excess capital?  Pay off the mortgage or invest in Mr. Market.  I have heard many arguments to this question.  Why pay on a 5% (or less) loan when I am making 10+ % in this bull market?  Seems like the choice should be clear, but its not!  When I look amortization schedules, I notice the interest is front-loaded in the loans, meaning the first few years it seems like all of my payments are pure interest.... 

 If my payment is 550 for the month and 400 went to cover the interest, then that 5% loan I signed up for seems to me like a 72% interest loan...

When I was driving home from work, I listened to John Pollock on the radio (financial tax strategy specialist).  He discussed a concept called "Cash Flow Equivalent Return,"  which I thought was brilliant.  To put this idea in words, he made an example:

"Let’s imagine a mortgage with $100,000 in principal, and a $1000 monthly payment.  If I won $100,000 in the lottery, and paid off the house, I’d save $1000 each month.  The big question is this – if I put that $100,000 in the market instead of paying off the mortgage, what kind of rate of return would I need in order to get that same $1000 per month benefit in my cash flow?  Said another way, what’s the Cash Flow Equivalent Return that I need to break even?  I’d need to make $12,000 a year from my $100,000, a 12% return."

The example above highlights the importance of paying off debts, which is something I have been working on diligently.  In my personal case, my rental income will more than cover my families expenses if I was debt free, so this also catalyzes my debt repayment efforts!

My Big Financial Picture

I created a new tab up top Titled: My Big Financial Picture.  This is something I will update monthly as I update my Net Worth spreadsheets on the side. 

I started developing my own REIR strategy to help me make better financial decisions in life.  The E stands for "Eliminate Debt."  My debt level is something I always monitor and try to reduce every chance I get.  Last year I spent $9519.16 in interest.  This may or may not sound like a lot to you... But when I look at how little I make from my current day job this 9k+ is huge to me!

Dave Ramsey says the "Pinnacle" of your financial life is the point where your passive income surpasses your expenses.  This is the ultimate point where you can quit your job and let your passive activities pay your bills for you.  I always track my passive income versus my expenses to see how I have been trending over time.  On my new tab I track it 2 ways because my rental expenses seem to throw things off when figuring this out.

Saturday, April 6, 2013

The end of monthly updates, but the beginning for good change!

It is already April 6th and I have not had the chance to make a regular monthly update of my average dividend income.  From this point forward the information for will be found on the dividend investing portfolio tab.  The charts I have been posting always paint a clear picture on the direction of the portfolio, that sometimes words cannot describe.

A lot of people I follow have tabs that display share information that I enjoy.  In the near future I will be implementing something along these lines on my blog.  This will give me the chance to focus more on REIR and real estate posts.  I admit I get caught up in dividend investing aspects of my overall portfolio because of its simplicity, but it really is just a small part of my portfolio and my understanding of investments in general.