I hate it when people ask me where I want to be in 5 years-- I just never know how to answer the question. But financially, I'm starting to have a better idea.
I've been playing around with a spreadsheet to try to project my net worth over the next 10 years. I'm predicting slight increases in salary, slight increases in expenses, the shift in housing expense from rent to interest+principal, and a decrease in my investment income, since a big chunk of what is now cash is transferred into home equity. Then I'm projecting out what my mortgage balance will be, and putting in different scenarios for what the value of the home will be-- very conservatively!
The other tricky thing is trying to predict investment gains. I think I need to re-estimate that part of the spreadsheet. Right now I just have in some rough numbers based on last year's totals. But of course this year the stock market has been down, so the results will be much lower. And then going into the future, I need to add some calculation that just estimates an average return, I think, based on a portion of my net worth.
Here are the numbers based on my current scenario:
Year | Year-end Net Worth | Var % |
2005 | $256,348 | |
2006 | $279,648 | 9% |
2007 | $323,931 | 16% |
2008 | $374,396 | 16% |
2009 | $447,673 | 20% |
2010 | $521,963 | 17% |
2011 | $598,569 | 15% |
2012 | $681,443 | 14% |
2013 | $760,250 | 12% |
2014 | $847,451 | 11% |
2015 | $939,210 | 11% |
2016 | $1,029,849 | 10% |
2017 | $1,125,051 | 9% |
I think my numbers are conservative enough that I can safely say I'll be a millionaire in 10 years, unless something disastrous occurs (knock on wood). Given that I increased my net worth by about 25% last year, I think these overall increases seem reasonable. And since my percentage change in the later years is tapering off, I probably need to more accurately reflect the larger gains I'll get from non-real estate investments as my net worth grows. My budget for next year, even given increased housing expenses, is to save 13% of my gross income (*not counting maxing out my 401k, which would bring it closer to 29%), and I think my income should grow faster than my expenses.
And as for the included housing value, who knows. This scenario has it at 0% change for the first few years, and then increases of 3% per year later on. I'd like to think this is conservative, but who knows! However, even if I assume decreasing home value for the next few years and then have it increasing again slowly to the point where it's about what it was when I bought, I should still be a millionaire by 2017. Just not as much of a millionaire.
It's an interesting exercise-- one of these days, I'll get the spreadsheet into a pretty enough form to post it here-- I'd like to be able to just enter different variables and have it spit out the results for each year based on each scenario. Geeky Excel fun, my favorite!
7 comments:
What amount of your projected 2017 net worth is real estate? Do you expect to have the same condo in 2017?
I think a 3% increase a year on a place in NYC is pretty conservative, indeed. Congratulations on being able to save so much of your gross income! Your retirement, condo principal payments, and savings post-retirement is a very awesome %!
The 2017 real estate net worth is about $220k (equity, not resale value of home). I'm not someone who moves around a lot, so I wouldn't be surprised if I'm still living there. I've also thought if I could save up enough money for another down payment, I would keep this condo as a rental property and buy someplace else to live in.
That would be a good thing to add to this calculation-- how much of my net worth will be in retirement savigns, and how much would be available for a down payment on another home, so I can figure out if or when I'll be able to do that!
I love flipping spreadsheets too. Because I have a hard time equating nominal future values to something meaningful, I use real (after inflation) growth rates. However, then the numbers don't appear so big. ; ) For those willing to spend a little money, I found ESPlanner a good, comprehensive, modeling program. (I have nothing to do with them, but I have looked at a lot of programs and have bought related Excel-based tools.)
You need to allow for the risk in your investments when projecting returns. Just plotting out a steady increase based on average expected returns is totally misleading. Have a quick look at some excel modelling I did for my portfolio today to see what I mean. It also has a link to some good forward estimates of asset class returns and risks you could use.
http://www.enoughwealth.blogspot.com
nice planning..
great optimistic outlook!
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