Thursday, January 17, 2008

Goals for 2008

Ok, how am I going to figure out some goals for this year? As I've mentioned, a net worth goal alone now seems a bit too simplistic. But it's still a handy way of tracking my progress.

From 04 to 05, my net worth increased 24%
From 05 to 06, it increased 22%
From 06 to 07, it increased 15%

Should I set a goal for another increase of a similar percentage? A 10% increase this year would put me at about $396,000. A 15% increase would put me at about $415,000. 20% would put me at $432,000. Should I play it safe at set myself a modest goal of $400,000?

Or should I delve into this a bit more, by looking at each piece of what makes up my net worth and projecting where it could go this year? Here's how I thought it through:

A couple of assumptions:

  • I think my level of spending will be somewhat consistent with last year, with a couple of exceptions. All this will be factored into my 2008 budget.
  • I'll get a small raise and a moderate bonus

Unknowable factors:
  • Market performance
  • Home value: I'm going to assume it will stay flat, and just account for paying off the principal on my mortgage.

I can project how much my cash will increase due to savings and interest earned. Let's say I average 4% on what I have, at a minimum. Then as an upside, let's add about $2,000 in cash savings (not counting retirement)-- that effectively increases my cash by about 10%.
I can project the increase in the value of the bonds as those have a pretty steady interest rate. I think it's a little over 4%.
I can assume my credit card liability at year end will be in the usual range of whatever happens to be outstanding between paying it off in full each month, so basically 0% difference there.
For home equity, I'll put in an increase of about 4% again, as that is about how the principal payments worked out this year.

Then I can put in a range of how much I think my investment accounts might increase. So far this year they are down. Yuck! I can be optimistic and assume that they will at least recover enough to stay flat for the year, and as a maximum, I'll assume that they could increase as much as they did in 2007, so let's say 0-7%, for both my E*Trade account and my retirement accounts. Then I have to add the $15,500 I'll put into my 401k to the projected amount for the retirement account, and I'll round it up to $20,000 to include Roth IRA contributions. This may be missing the impact of dividends, etc. as my actual retirement increases from year to year have been much higher. What if I just use a percentage in that range instead?

Here's a picture of the spreadsheet I used to work all this out:

In the end, I'm actually going to stick with a number based just on slightly less than a 14% net worth gain: $410,000. It's about mid-way between my high and low estimates. And to achieve that goal, I'll have sub-goals of:
  • Fully funding my 401k with contributions of $15,500
  • Saving enough money to fully fund a Roth IRA at $5,000 (we'll see if I'm still eligible)
  • Saving an additional $2,000, at least. That doesn't seem like much, but it's in line with the kind of expense budget I'm working on.

That leaves the rest of the goal to be reached via investment performance. I worked it out that if my E*Trade account grew by 4.3% and my 401k had returns of somewhere around 9-10%, I could get there. (It's a little weird trying to properly do this math and factor in compound interest, etc., so I'm probably off a bit!) Based on what I've already said about not expecting great things from the market this year, that might not be all that realistic. But maybe it will work out once all the dividends, etc. are factored in, as the overall gain is less than I had this year.
So that is the plan! I like breaking it out this way, as it will let me see if I met my goals on things I can control, and give me some idea on whether I am estimating reasonably on things I can't control. Wish me luck!


Anonymous said...

I'm setting my goals VERY conservatively for this year. I've already lost about 10% of my retirement portfolio this year due to the market. It's almost going to be impossible to pull off a year in the black now.

Chicago Rob said...

Be conservative. Someone at your age should be investing aggressively for your 401K, which means your returns will not be 9-10% for this year. And your home will probably not increase either.

SandyVoice said...

I like your personal saving and investing goals. That you have control over, and if you follow your guidelines (and why shouldn't you?), you will be substantially ahead at the end of the year. And you know that eventually the stock market will rebound. It may take a while, it might not even be this year, but if you just keep funding your investments, the worth of the account will head up with the market. You are lucky, because you're young, and you don't need the money this year while the market is down. by the time you retire, the market will be much higher, even if it's gone up and down in the intervening years.

Madame X said...

I am definitely thinking conservatively even if the goal number I picked seems a little aggressive on the investment side. If I don't make it on that piece, I'm not going to stress about it. What I'd really like to do is find a way to exceed the controllable parts of the goal, and hopefully there will be some upside in maybe getting a better bonus than I've budgeted for. And if I ever see a comp sale that I think is valid in relation to my condo, I might consider adjusting that number, but I certainly won't be counting on it.

Kansas Simplicity said...

First - great on the goals. Love it and do the same myself with savings this year. I am trying to save 50% of my gross again this year yet a stretch for sure. One key assumption I am making in 2008 and 1/2 of 2009 is recession and that impacts equity markets. Not to say money can not be made yet as I am not an expert on the many techniques and use index type of investments, my perspective is a drop of 15% more in the market place.

Also, as far as a home, the Schiller index (except your area I believe) has home prices falling for the next two plus years which will impact net worth too.

So, keep saving, finding ways to invest your money as a wise person you are :>) and stay frugal as the long term will win.

Michelle said...

I really hate to be the bearer of bad news. In 2007, I hit $100,000+ for the first time myself in job income (including bonus, overtime, and exercised stock options), which sounds great. But, it has some negatives, too. We are now considered "highly compensated" according to the IRS. And, the IRS limits 401k contributions for highly compensated individuals.

You won't be ALLOWED to contribute the full $15,500 this year. Your exact contribution percentage depends on your company (call your benefits dept). But, my limit is 10% of salary alone, which won't get me anywhere near the 15,500.

It totally sucks. We're giving up a chunk of the company match, some tax reducing ability, and growth in a tax deferred account.

Let us know what your benefits dept has to say.