Friday, 24 July 2015

My net worth?

I don’t track my net worth. I know, I know, this seems to be a bit of a faux pas in the FI community – how else do you track your progress to the summit of FI, get your little hits of oxytocin for a job well done and a teensy bit of smugness thinking I’m a step closer to being to have that conversation with my employer… actually even if I was able to walk away tomorrow, I probably wouldn’t, but more on that later.

Back to reality; I can’t walk away, I’m hacking through the foothills of FI. Short term reasons for not paying close attention to my net worth are quite selfish, I don’t really have the time and I’m a pretty poor accountant, so the idea of taking time I don’t really have to draw up my own balance sheet sounds annoying.

As covered previously I’m doing okay in my plans, I know I’m saving hard and I know I’m keeping control of my spending, so the net worth will take care of itself.

Also, net worth, in relation to FI, is only useful for what you get from your investments. If you think about two different people – one is Jim, who has $1m of gold sitting in his vault. Next is Jack who, for the price of a cow bought some magic beans, grew a stalk and acquired a brand new goose that’s providing some top end 24 carat output following a hostile acquisition. Your gold-bug has a much higher net worth, but no income, whereas Jack has invested c.£1,500 on some beans, but if he feeds that goose right, he’s sorted for life.

Yes, your gold bug could sell the gold for some income producing assets, and his net worth would still be higher, but both will achieve the same financial freedom with very different amounts of capital.

Back to me, as I'm building assets, if there was a stock market crash tomorrow my net worth will follow a similar path, but this is where you buy your magic beans. Lower prices mean higher yields and more bang for your buck. Reinvestment of more dividends earned from buying cheaper shares adds further impetus to grow your potential income and capital more quickly. Too much focus on net worth in this situation could cause you to panic and lose focus on the prize.

So I would like that FTSE fall please. About 15ish% would be about right, and a recovery to prices that takes a couple of years. Any more than this and something has gone quite seriously wrong in the economy, and any less wouldn’t provide the supercharger effect. Importantly with this sort of fall the impact would be mostly felt by the short run value of companies as set by the stock market, rather than any sort of company killing impact of a big economic shock. This also explains my focus taking advantage of lower share prices, rather than the ability for companies to earn cash and pay dividends.

I think net worth matters most when you’re close to, or have surpassed, your Escape Number and you are thinking about supporting your lifestyle, post work, from that pot. I’m not close, so until then I’ll focus on the FI mantras of earning, saving and investing. I'll keep an eye on net worth, but without getting too hung up on monitoring it’s every move as it might even be counter productive.

If anyone thinks I'm completely off the mark or have missed something, please let me know!

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