How much money do we need?
I don’t find net worth to be that helpful of a metric. Without a target, is just an abstract number. I like to see it grow, but what does it mean to me? In order for it to be more meaningful, I need to have a rough idea of what I’m trying to get my net worth to be.
But net worth isn’t the whole story. How much of that is income generating, and how much of that is in assets (e.g. home equity)? In order to add meaning to my balance sheet, I’m calculating how much we would need in order to be financially independent.
Our total spending will be around $75,000 this year. We had a lot of spending in the home category (>$20k) as we moved into a new apartment then a house. We bought some furniture and did some home projects. I obviously excluded our down payment. I’ll let that stand for now, then revisit this calculation some time in 2015.
In order to achieve financial independence, we would need $2.5 million in investible assets (assuming 3% return, $75,000 / 0.03 = $2,500,000) in today’s dollars.
However, we are planning on some of our extra income into owning our house. Ideally, we’ll have the house paid off in ~15 years. With a paid off home, this number drops to about 37,000 per a year, or $1.2 million. Property tax & maintenance are included in that number, but I will need to revisit the number once we’ve been here a bit longer.
How far do we have to go? Right now, we have $330k in investable assets, not including our various cash funds, not including home equity. We have a long way to go! Assuming a very conservative 3% return on investment and $36k per a year, our savings can grow to 1.2 million in 15 years (calculator). This coincides nicely with my rough goal to have our mortgage paid off in approximately 15 years!
This calculation is pretty rough. First, I don’t think this year’s spending is very representative. Also, I ignored income taxes (the majority of our savings is tax deferred, but some is post-tax ROTH). To top it off, we both have pensions (his growing, mine not). I turned down a cashout of ~$20k for mine this year, as I calculated the value was about $33k Yet, it isn’t going to generate an income stream until I’m older And what about inflation? Anyway, I think a fair compromise would be to track progress towards 2 million, and use that as a benchmark until I make a more detailed calculation. That would be closer to 25 years, so we have to up our game or check our spending!
Doing even this rough calculation does give me some intuition about how I want to allocate my money towards my goals. I’m not making any changes just yet.
PS – I do very much like the “PF Score” as a usable and useful metric, and have been tracking mine this year.