I guess the real question is ‘what is Net worth ?’ I use the term ‘what’ as it is not as obvious at it seems. For example, what do we include, what do we exclude and just as important is when do we do the calculation.
In the world of finance, it is common for fund managers to run an end of day calculation (in reality it is often more and even in some cases a live view). Anyone who has seen the film Margin Call (based on the 2008 financial crash) may remember when panic set in as the firm was theoretically insolvent several times in a month. They essentially did a sum of all parts (assets & liabilities) and came to a negative number – a very big one in the 100’s of millions.
For us at home and looking at our own fund management, we simply do not need this level of detail. What we need is a fairly accurate picture once or twice a year and over time to see patterns and trajectories. It is incredibly satisfying to watch the amount owed on a mortgage go down and the house price go up year on year. We all fall for the illusion we are richer… but it sure makes you feel better.
Why illusion ? Well, in the case of a home, we have to live somewhere, and unless we are selling to downsize frankly whether we have £10K mortgage and £300K home, or 200K mortgage and £300K home is of no real relevance day to day.
The graph charts our outstanding mortgage vs estimated value over the past few years with an extrapolation to term (if we choose not to pay of early).
The material factor is when we stop paying a mortgage – that lowers (often significantly) our outgoings and can give us enormous lifestyle options ….. enter stage left the FIRE movement.
Currently our LTV ratio is less than 20% which is great, but has a much bigger implication long term, should there be a big housing correction in the next 4 or 5 years. One of the key disciplines the FIRE approach tries to get over is balancing risk. Clearly if you have a loan at 85% of value and the market crashes 20% you are stuck often with banks seeking to reduce their balance sheet liabilities. But with 20% if the market crashes 20%, we still have a very healthy margin and the banks leave us alone. FIRE is not just about independence, its about giving control back to us and not others, and giving us the freedom to chose… to have options. FIRE is about taking the stance of picking a moment in time regularly to review those options and decide ‘what next ?’. Long term this has implications with fund returns, sustainable withdrawal rates and sequence returns …. future topics to muse on !
What is out there that may already do this ?
Well, a scan about shows various tools from the ludicrously simple (to the point of irrelevance) to the very complex including some online management tools. One often mentioned (particular by those in the USA) is ‘Personal Capital’ . Lots rave about it, but aside from being a US system it has one fundamental flaw. It relies on you giving over some personal information and (although being non US I could not get that far) some level of banking and fund account details. This just seems to me to be less than safe & secure. Perhaps I am being over-cautious, but the rapid growth of online scamming, phishing and financial fraud does suggest keeping your own details private is a good thing. Also, these systems are just not necessary. I mean … how often do you really need to look at your personal picture ?
For me, the key criteria that evolved was it had to be simple, maintainable and give a clear picture. Later on I started thinking about integrating with an income & outgoings tracker and forecaster to give a much wider picture but I will save that for another time as there are rather more options and factors to consider.
So what goes into a NET Asset Value Tracker ?
Simply put .. a list of assets and liabilities.
But again, I come back to one of the bigger goals – its all about a picture. So a long list is not really very useful even if its the overall bottom line you might be interested in.
My Tracker has 5 sheets: Cash, Liabilities, Assets, Pensions and a Summary page, and below is a simplified snap of the summary. Similar format on each other sheet – just line item all you want to break down and be consistent.
Note: lots of numbers changed, multi-liners aggregated etc – this is an example for effect and not my actuals
If one item (say a Loan) ends or is closed and you take another, just add another line item. This way there is no mucking about with notes over time .. its all just clear.
There is nothing magical in any of this. Each fund you have can be line itemised and recorded. Just pick a date and be consistent – it is a snapshot. I chose 10th April because the year I started that was effectively the end of my tax year. Pick 31 Dec if you prefer. Add a column every 3 moths, or 6 months. It matters not as the value is to trend over time and just give you a picture.