Every year, at the end of the year, I calculate my (liquid) net worth, and review my spending for the year that is finishing up.
I have done this for over two decades, and have come to realize that I don’t do this (only) for the pleasure of seeing an ever-increasing number. Especially for 2022.
There are a few other valuable aspects of this exercise, which have benefited my finances greatly over the years.
I will review my annual spending in another post, but in this one, I will go over my net worth update, and offer some thoughts about why you too might benefit from such a practice.
(Just to be clear: I am not posting my net worth on the Internet. Even though this is supposed to be an anonymous blog, I have been asked by Mr. PiN not to put our real numbers out there.)
The Liquid Net Worth
As noted above, I don’t necessarily calculate my official net worth.
I don’t bother with the estimated value of my house, my car, or my collection of ’80s SF/F paperbacks. Instead, I am only concerned with my liquid net worth: money I can realize within a very short period of time, minus legally owed liabilities.
So around December 31, I log into my retirement accounts, my bank accounts, investment account, and look at the totals.
I log into my credit card accounts, and total up the balances due. Before paying off my house and car, I would check my balances there, as well.
Some quick arithmetic (add up the assets, subtract out the debts) and, voila! I have my net worth for the year.
Benefit #1. I have a snapshot of my finances.
I can compare my total to last year, and other prior years. I can graph, multiply, and otherwise play with numbers to my nerdy heart’s content.
Benefit #2. I have to log into and review each of my financial accounts.
This includes remembering (and possibly resetting) passwords, leaving a record of their existence (Mr. PiN could use this list to find accounts if he didn’t remember we have them), and once again considering whether this is a useful account for our household.
The yearly goals
The other part of this exercise involves my yearly (financial) goals.
Setting goals
I don’t really have an Investor Policy Statement, beloved by personal finance bloggers. (It’s one of those things that I look at and say: I should probably do that, with the same enthusiasm as those couch potatoes who know they ought to exercise.)
On the other hand, I do set financial goals every year, and check in at the end of the year to see whether I met them. I find that this performs a similar service as the investor policy statement, without being so detailed that I avoid it.
I usually list things that I want to save for, and how much money is needed. If I have a very large goal, more than I can fund in one year, I detail how much I want to save in the coming year.
Here is an example from my 2016 wrap up, when I still had a large mortgage and a new car loan. Each fund is listed with the purpose, the desired amount (omitted here), and account(s) in which the money was being held.
- Emergency Fund: [6-9 months of spending, in case I lose my job, or can’t work for another reason]. Held at the main bank in a higher interest account.
- Car Fund: [Money added each year, with the plan to save enough to pay for a new car in cash.]. Held in my “secret savings account.”
- House Fund: [For home repairs, or maybe for large purchases–like a new sofa. Money added each year to keep the total topped off.] In a separate account at the main bank.
- Vacation/Travel Fund: [As for the house fund, money added each year to keep the total steady. For guilt-free travel. I don’t want to be paying off a vacation several months after it is over.] Held in a separate savings account at the main bank.
- Investments. [This is for investments outside of my employer-sponsored retirement accounts: think IRA, taxable investments]. In my first job, I sent my bonus money to my investment account to buy more stocks; these days this is funded almost exclusively with the dividends my investments generate.
- Addition Fund vs. Piano Fund. [Alternatively, this could be called our “Expensive Plans Fund.” Our house is not suitable for old people with arthritis; the only way to age in place would be either to make expensive adaptations, or make an addition. Possibly with an elevator. Also, we eventually would like a real piano in the house.] If there is any cash left over in any of the various funds, I can assign it to either of these goals. That hadn’t been an issue for many years, as most extra cash was thrown at the mortgage.
Reviewing last year’s goals
At the end of the year, I review the goals I set at the end of the prior year.
For 2016 (decided on at the end of 2015), there weren’t that many goals, but I did well:
- Top off House Fund and Travel Fund (done!)
- Add the yearly amount to Car Fund (done!)
- Pay down mortgage by an ambitious goal (done!!!!)
These annual exercises add 2 more benefits to calculating my (liquid) net worth.
Benefit #3. Emergencies are covered and dreams are funded.
An emergency fund is a must, in my opinion. It should be liquid, and pretty easily accessible. It should cover big emergencies–such as having no income–well enough that you can sleep at night.
And although I don’t rely on sinking funds as much as other people may, I feel much more financially secure knowing that I have money put aside for “one time” costs, both expected and not entirely expected. No reason to worry if the water heater goes, or even the AC system.
Every year I think about what I need and what I want to do with my money. I may change my mind from year to year. I might even miss my goals. But paying attention to my goals, and writing them down, means I meet more of my goals than I miss.
Benefit #4. A plan for extra money.
Though I don’t think about my yearly goals constantly, and sometimes I just don’t work on them, they do help set an intention for “extra money” (bonuses, tax refunds, built up savings).
When the goals were big, like buying a house, or paying off the mortgage, it was easier to remember what I was going to do with leftover savings. But even having a vague plan (fund Backdoor Roths, save for early retirement) is better for me than no plan at all.
I have proven to myself multiple times, that money without a purpose tends to melt away without much to show for it; so setting savings goals at the end of every year helps me shepherd that money to the correct places.
The 2022 update
Some readers may wonder: what did 2022 do for (or to) the PiN household?
The Grand Total dropped
Despite putting away money from each paycheck into the 403(b) retirement account, saving money every month into my secret savings account, and also receiving an inheritance from Mr. PiN’s mom, we ended the year with a liquid net worth significantly lower than last year. Like, 1.5 x my gross salary less.
On the other hand, in 2021, I noted our net worth had gone up by more than 3 x my gross salary. The last time I got so excited about investment gains helping my net worth, it was January 2008; you can guess how bad the numbers looked by 2009. I sort of, probably should have, expected a drop this time, too.
It looks like I should plan on working a bit longer.
At the same time, if I look back to the end of 2020, I can see that my net worth is still quite a bit higher. Much more than the worth of all my retirement contributions (and Mr. PiN’s inheritance). I guess the market has been good to me overall.
The Plan(s)
How did I do with my plan from the end of 2021? What is my plan going forward?
Last year’s plan was to maintain (or top off) various savings accounts: the emergency fund, the house fund, the travel fund, the car fund maxing out my 403(b). All taken care of.
The plan also included funding Backdoor Roth IRAs for me and Mr. PiN and “investing” a set amount that had built up as cash in the taxable investment account. The Roth IRA money was moved appropriately, but never invested in anything. Similarly, the money in the taxable investment account stayed in cash as well.
I was dithering about investing in stocks as I (hopefully) approach early retirement. And as it turned out, I have lost money to inflation, but retained capital (unlike what would have happened had the money gone into, say, VTSAX).
Nevertheless, I would say this was a failure. Or at least a miss.
The Plan for 2023
Going forward, I envision many of the same goals: keep up the emergency fund, the car fund, the house and travel fund. Putting aside money for his-and-hers Backdoor Roth IRAs. This will mean putting money aside to top off funds as they get used for vacations, house repairs, etc.
Another goal, maxing out my 403(b), is getting harder as the limits go up but my salary does not.
Over the past year, as I saw stocks decline, I became more enamored of saving cash (or equivalent) for the first few years of retirement. Those years aren’t here yet, but I am hoping they will be coming soon. When that time comes, I would like to have a solid cushion of non-volatile funds to live off of, in case the stock market declines again just as I am handing in my badge and signing out my in-basket for the last time.
My goal is to save 3 years’ worth of expenses as cash. Including my emergency fund, other savings, and money I “forgot” to invest in the stock market last year, we are about 75% of the way there. With lots of fudging as I figure out what to call my yearly spending (with or without health care? At 2022 rates or whatever we end up spending in 2023 or 2024?).
If all stays the same this year (I am sure it won’t), we should be able to hit that cash saving goal in 2024. That part is relatively easy, as it is taken care of on auto-pilot.
The next hardest task for this year will be to look ahead to 2024, once that savings goal has been achieved.
What will we focus on next? Deciding whether we will actually put an addition on the house to let us stay here safely when mobility declines? Buying that piano? (We may have a line on the family piano, which will save beaucoup buckage.). Throwing money back into the stock market, possibly lamenting that we didn’t put more in during the lows of 2023?
Luckily, I have the whole next year to figure that out.
Do you set money goals for the year? If yes, what does your process look like?