Suggested Net Worth Growth Targets By Age

US Household Net Worth Chart 2013Methodically growing your overall net worth is what wealth creation is all about. Your net worth is the culmination of savings, investing, real assets, and liabilities. I’m much more concerned about growing my net worth than only growing my stock portfolio because my stock portfolio is just a portion of my net worth.

Think of your net worth like a battleship during a time of war. As the intrepid captain, you are navigating your net worth to glory through sea mines of temptation and unknown icebergs of economic downturns. The greater you build your net worth, the more careful you steer.

It’s always important to think about your net worth in a risk adjusted manner. Putting 100% of your net worth into the stock market isn’t so bad when you’re a single 28 years old with $150,000 to your name. But if you’re 50 years old with a couple kids entering college, you’re likely not allocating your entire $1 million in assets into the stock market.

When I was in my 20s, I didn’t really track my net worth because I didn’t know better. I was focused on my career and saving as much as possible. My idea of net worth diversification was investing as much as I could away from the stock market given my pay and career were already dependent on the stock market. Every year 20%-30% of my compensation was paid in the form of company stock so there was no escape.

For 10 years this strategy worked pretty well because the stock market really didn’t go anywhere from 2000 – 2010 and real estate caught fire until 2007. Now everything is on fire! Let’s just hope the battle ship doesn’t burn down with so much unbridled mania.

I’ve been much more surgical in managing my net worth in my 30s given it has grown to a point where it throws off an important passive income stream. Not having a day job anymore makes it that much more important to protect my financial nut. If I can grow my net worth by 10% per annum, I’m usually satisfied. To put 10% in context, Bernie Madoff was able to amass $50 billion dollars under management because he delivered fake 10% annual returns!

In this article I’d like to provide several net worth growth targets to consider as well as a net worth growth framework by age. I think if I was able to read this article four years ago, I would have allocated more of my net worth into equities and would have a 10% higher net worth as a result. Hopefully this framework will help many of you build wealth.

Top Financial Resolutions For The New Year

New Years ResolutionsHow many of you achieved last year’s resolutions? How many of you still remember what last years resolutions were? If you don’t write down your goals, you’re more than likely to forget.

Here’s a quick recap of my official five resolutions for 2013 written at the end of 2012. Only two are financial related.

1) Live Free. Although leaving Corporate America in 2012 allowed me to travel freely, I decided to take a moderate approach instead due to the unknown risk of no longer having a paycheck.

Result: Pass. 2013 was much more of how I thought a free life would be like compared to 2012 because all the building blocks were already set. The longer you go without an income, the more confident you are you don’t need a job to survive. 12 weeks of travel and setting my own schedule felt great. Now that I’ve experienced absolute freedom for over a year, I’m now considering going to work part-time for a start-up or even full-time if there’s a great fit.

2) Bring The Family Closer. My immediate family all live 5+ hour flights away. I plan to leverage my finances, the internet, and our shared interest for travel to keep our relationships healthy.

Result: Work in progress. I convinced my sister to invite our parents to go visit her during Thanksgiving last year, a win since they live 11 hours by flight away and her apartment doesn’t comfortably accommodate four people. She’s got a busy life and my parents don’t want to intrude. I’m very grateful to have crashed at my sister’s place for 10 days this summer. We had awesome life conversations that haven’t been discussed in over 10 years. Finally, several articles on FS helped open up some candid dialogue between my parents and I, which is always one of my intentions. 

3) Grow Net Worth Faster Than The S&P 500. It’s one thing to have the stock portion of your net worth outperform the S&P 500, it’s another thing to have your total net worth outperform the index. A 9% net worth increase should be feasible if my stocks and real estate equity grow faster than 11% (70% of net worth) to make up for my CDs and risk free assets which will only grow by about 4% (30% of net worth).

Result: Pass, but disappointed with 32% due to greed since everything went up huge in 2013. I understand why busy people appreciate leaving their money up for others to manage. It feels good knowing someone is looking out for your money manners as you go all out on your entrepreneurial goals. This is my main financial resolution I’ve had for 10 years. 

4)  Put My Finances On Autopilot. I’ve been using an Excel spreadsheet with over 50 line items to track all my expenses, assets, and liabilities manually for the past three years. I still enjoy keeping on top of my finances, but I want to spend less time focusing on the nitty gritty since my spending, saving, and investing patterns are pretty set. Instead, I’m leveraging technology to stay on the ball. To care less about your finances, you first have to care a great deal about your finances.

Result: Pass. After deciding on a savings goal, a monthly spending limit, a comfortable net worth allocation, and a travel budget for the year, that was it. I enjoy checking-in on how my boys are doing to make sure they’re behaving, but I don’t have an obsession anymore that takes away time from doing other enjoyable things thanks to technology. 

5) Smile Much More. When I was younger, a friend of mine nicknamed me, “Smiles” because I would always be smiling and not even know it. I’d walk by strangers on the street who would always weirdly smile back. As I entered into the real world of work, bills, graduate school, and financial responsibility, I think my smiles have faded. I’d like to regain this natural disposition and spread some cheer.

Result: Undecided. When I bashed my face that one night from too much partying, I may have thought to myself, there goes my smile due to the huge hole in my lip. But the doctor stitched me up good and supposedly the scar will fade over a year. But this goal really isn’t about physical appearance. It’s about being so happy you’re unaware about positive physical manifestations that occur that brings more joy to those around you. 

If You Can Make It In Hawaii You Can Make It Anywhere

Kahala Resort & Hotel View

There’s an old saying, “If you can make it in New York, you can make it anywhere.” The idea is that with New York City being so competitive, only the strongest survive. I worked on the trading floor at one of the most hardcore investment banks around and I can unequivocally tell you that making it in NYC is brutal. The weather beats you up for at least six months a year, the work hours are long, and your money doesn’t go very far.

Two years and 15 pounds heavier I left NYC in 2001 for an easier life out in San Francisco where I didn’t know a soul. I thoroughly admit I didn’t make it in NYC. Perhaps I could have stayed on as a third year financial analyst, but surely Goldman would have made me go back to business school afterward rather than promote me directly to Associate. The thought of returning to school at the time and spending all that money wasn’t appealing.

By spring 2001 it was clear the economy was not in good shape one year after the NASDAQ collapsed. I decided to take matters into my own hands and jump to a competitor for that Associate promotion and raise instead.

Waiting to get let go is like waiting to die.

Why Do The Rich Hoard So Much Cash?

Cash And Net Worth Charts

The rich are bullish on the economy just like the investing middle class. The difference I’ve noticed from surveys and speaking to people of both classes is that the rich hold much more cash (risk free assets) as part of their net worth as compared to the average person. Citi Private Bank came out with a survey of 50 representatives who manage high net-worth families that nearly two-thirds of their clients think it’s more likely the stock market will go up at least 10% in the coming year than lose value. I can get behind this bet.

Yet these same wealthy investors have, on average, almost 40% of their portfolio in cash with stocks averaging only 25% of their portfolios! The rest are in bonds, commodities, and real estate. 40% is a shockingly high number that completely goes against the wealthy class’s beliefs about the future. I get prodded by young investors who’ve never seen a bear market all the time on why I have 25% of my net worth in 3.5-4.2% yielding CDs. Usually I just smile and move on because there’s no use arguing when times are good because everybody thinks they’re a genius.

This post attempts to understand why those with financial means stay conservative even in a raging bull market. I’ve spoken to dozens of multi-millionaires about their net worth asset allocation and have found similar, but not as extreme high cash allocations. These findings run very counter to the young bucks I encounter with $150,000 stock portfolios that make up 90%+ of their net worths.

Filling The Void In Early Retirement With Part-Time Work

Hawaiian Sunset With Sailboat In Retirement

Over the past one and a half years since leaving Corporate America I’ve done some deep thinking about early retirement through posts such as:

* How Does It Feel To Retire Early?

* Should I Go Back To Work Now That The Good Times Are Back?

* Do You Work Harder Or Relax More During Good Times?

* The Startup Riches Myth: Sell For Millions And Still Not Be A Millionaire

When you’re used to working 12 hour days every day for 13 years it’s very hard to suddenly downshift from sixth to first. You’ll blow up your engine if you do. There needs to be a gradual progression whenever large life changes are made.

The first six months of retirement I was second guessing myself on whether I made the right move. I had just turned 35 years old and short-circuited my career in finance so I could spend more time traveling and doing this new thing online. I worked my ass off to finish writing my book on “How To Engineer Your Layoff” so I could at least say that I produced something meaningful if all went to hell.

My doubts began to calm down during my second six months of retirement because I was able to take a 2.5 week long business trip to Europe to research the happiest people in the worldTraveling while writing and maintaing my online business helped crystallize why I decided to leave Corporate America in the first place – more freedom!

The final six months have been an absolute blast, with six weeks this summer in NYC, Mallorca, and Switzerland (links to FOMO, finding perfect summers, and eradicating apathy) and four weeks this winter in Hawaii all the while working of course. There’s absolutely no law against having fun while traveling to understand different cultures to share them with all of you in my writing. The key is moderation.

ONE THING MISSING FROM THE BELT