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
- 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!