Thursday, July 26, 2007

Tracking my Net Worth

Many bloggers publish their net worth figures. I will not be providing figures, but do show the graphic to the side to illustrate my method. The graph tracks my net worth over the last several years and separates it in to categories.

Starting from the bottom of the graph:
-- The blue area is cash and demand deposits.
-- The area above that is government savings bonds, which are almost as liquid as cash.
-- The yellow area represents the value of stocks held outside of retirement accounts.
-- The green area is the value of my titled property (house and vehicles) less any loans (none).
-- The dark red area is the value of my Roth IRAs.
-- The pink area at the top is the value of my tax-deferred retirement accounts, traditional IRAs, 401(k)s, and the cash value of my company pension.

By doing this, I can see liquid assets on the bottom, retirement assets on the top, and property assets in the middle. Or you could view it as short term on the bottom, long term at the top. There is some debate in the personal finance blogosphere as to whether or not the value of your house is really part of your net worth. I think that it is, but its liquidity is low. And if you do sell where are you going to live -- in a tent at a rest area or under a bridge? I think you should have an awareness of the portion of your net worth tied up in your property, but keep it in perspective.

Were I to report figures, they would be lower than what most people would report. Most people would simply add up the market value of their stocks, their 401(k) balances, market value of their house, etc. However, I discount account balances to be more realistic:
-- My government savings bonds are discounted by the taxes on accrued interest, at my current marginal rate.
-- Stock values are discounted by capital gains taxes.
-- My car values are the blue book wholesale value. The value of my house is estimated at 75% of the tax appraisal, to account for real estate commissions, fix up costs, etc, and any error in the tax appraisal (though it is usually about right).
-- My tax deferred savings is discounted as though I had to pay taxes at my current marginal rate. My actual tax rate in retirement may be lower, or contrary to most popular opinion may be higher. But it makes this year's decision as to whether to fund a Roth IRA or tax-deferred savings neutral with respect to tracking net worth.

My method isn't perfect. If it were, I would include the value of my household goods. But why bother? How much would I really get for them at a garage sale?

But in the end, it's like any good net worth tracking scheme. It allows me to get a sense of my progress.