Spending proportionately to your income or your net worth

In my recent post summarizing my discretionary spending of 2013, I shared the numbers as a percentage of my gross income for that year. Mostly I did it so my spending would look less horrific, but I also did it because it’s a good way to look at your finances.

Things don’t cost what they are priced. How much something costs depends on your financial situation.

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how I react to more or less everything now that I am on the strictest budget of all time

If you really want to put things in the context of whether or not you can “afford” them, consider whatever object your heart desires in context of your net worth or income. Regardless of the price tag of an item, it makes a big difference if spending money on it is an almost negligible dent to your bank account or a huge cut out of your life savings.

Think about it:

When I spend $200 on concert tickets as a salaried employee earning $75,000, this splurge represents only 0.27% of my income.

However, if I drop $200 on the same tickets as a starving student earning only $15,000, they now eat up 1.3% of my income.

So maybe in your head you’re thinking, “but that’s still a small amount, it doesn’t matter!” ok, but if I go to 10 concerts per year (and I probably will), then it’s only 2.7% of happily employed me’s income but a terrifying 13% of studious me’s income. And that’s about where I can’t afford it anymore. Most of us can fritter away 1 or 2 or even 5% of our gross income, but once we’re digging into double digits, it’s taking money away from our needs.

Another way to contextualize your spending is to think of it in terms of your net worth. If you’ve built up sizeable financial assets, a little splurge here or there isn’t going to rock the boat. However, if you don’t have anything substantial, or worse yet have a negative net worth, spending anything can make a big difference.

For example, if someone that has $50,000 in savings buys a $50 shirt, they’re only spending 0.1% of their net worth.

If someone else that’s only accumulated $500 buys a $50 shirt, they’re blowing 10% of their net worth. Scary, right?

The point of this is what you can really afford is relative. Blowing 10% of your net worth on a tshirt is stupid, you can’t afford that! But going to 10 concerts that cost less than 3% of your income is ok, even if they’re $200 apiece.

The more you earn and the more you save, the more you can safely spend without putting your financial security at risk.

The Logistics of ACTUALLY Increasing Your Net Worth by $25,000 per year on a $50,000 Annual Salary

This is one of my old paycheques:

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a screenshot of one of my biweekly twice-monthly paycheques from my old employer. Click to embiggen!

No, really. I logged into my old employee portal and took a screenshot of a random paystub from last year. I don’t mind sharing this info with you right now because, firstly, I don’t work there anymore, but secondly because the University of Alberta is ultra transparent with salaries so if any of you had ever really wanted to know what I was bringing in when I was working there, you could have simply visited this link and taken a peek. See? This is why nothing is a secret on the internet, it just sometimes takes a little digging.

Now the reason I’m sharing one of my paycheques with you — which is something I’ve never, ever, ever done before — is because a lot of commenters and tweeters balked at my 5 Steps To Increase Your Net Worth By $25,000+ Per Year.

They complained about taxes (as you can see from my paycheque I was giving up nearly $1,000 a month to taxes, employment insurance and the Canadian pension plan) and regular expenses (as if I didn’t have my own rent to pay or groceries to buy). If this plan looks to difficult, by all means, make up whatever excuses you need to in order to justify not doing it, but if you do actually want to increase your net worth by $25K per year and you make a normal salary, it comes with a bit of pain and sacrifice. If you want increasing your net worth by $25K per year to be simple and painless, then go earn $125,000 per year. It’s up to you if you find banking $25K on a $50K salary more or less difficult than earning $125K, it’s totally your preference, but there isn’t a net worth fairy that’s going to deposit $25K in your bank account every year for nothing.

Now let’s have some fun with math!

Gross income: $4,463.56 per month
Automatic pre-tax savings into retirement plan: $454 per month (net worth increase: +$5,449 per year)
Taxes and other deductions: $964.22 per month or $11,570.64 per year (net worth increase: $0)

Net Monthly Income: $3,021.22 per month

Regular expenses: Rent $750, Laundry $50, Electricity $25, Internet $50, Cellphone $75, Netflix $8, Groceries $200

Total regular expenses: $1,158 per month

Money remaining for miscellaneous expenses, entertainment, savings, investing, and debt repayment after paying regular expenses:

$1,863 per month

Average student loan payment*: $1,000 per month (net worth increase: +$12,000 per year)
Average income from dividends and interest**: $500 per year (net worth increase: +$500 per year)
Automatic savings to brokerage account: $250 per month (net worth increase: +$3,000 per year)
Automatic savings to personal RRSP: $250 per month (net worth increase: +$3,000 per year)
Automatic savings to TFSA savings account: $100 per month (net worth increase: +$1,200 per year)

Total Net Worth Increase: $25,149 per year

Money remaining for entertainment and miscellaneous spending: $263 per month or $3,156 per year.

Now, the fact that the remainder is in excess of $3,000 net income is important because I’m sure a handful of people are going to whine that my salary was over $53,000 and therefore not relevant to those bringing in only $50,000. Clearly if this plan of action I outlined above allows for a net leftover of $3,000, it’s under budget for the $3,000 gross difference in my salary from the suggestion of at least $50,000 base salary.

I realize I had a bit of a leg up by being able to save over $5,000 of my income for retirement before taxes. This is an advantage I had through my employer. If you don’t have access to the same perk then you will simply contribute to retirement with your after-tax income and get a bigger income tax refund when you file your taxes at the end of the year. Bank your income tax refund instead of spending it on stuff. Bam! Net worth increase. Are you getting the hang of this yet?

One of the things I really, really, REALLY want to emphasize is this:

If you can’t increase your net worth by $25,000 per year, increasing it by $20,000 per year instead is still awesome.

As long as your net worth is going UP not DOWN, you’re doing things right.

I understand that there is a myriad of circumstances contributing to different expenses that swallow your money before you get a chance to use it the way you want to. You have to keep in mind that the way things are are not necessarily the way they will always be. You still have time to get a raise at work, start a side business, make a killing on a good investment. It also means there’s still time to face an expensive personal emergency, get laid off, or suffer the consequences of a poor investment decision. I increased my net worth by $25,000 two years in a row. Next year I won’t. The year after I probably will, but that’s still uncertain. No matter what, I’m not going to kick myself for only saving $24,000 one year or over celebrate saving $30,000 the next. How much you can increase your net worth by is largely circumstantial — but an even larger part of the equation is your attitude.

No, you can’t have a car. No, you can’t go out for dinner every day of the week. If you want a ballin’ lifestyle while banking $25K/year, then EARN MORE MONEY — don’t whine at me that the laws of mathematics are restrictive! This is life, kids, this is how money works: you can’t spend more of it than there actually is (at least not indefinitely).

So there you have it: the real numbers of increasing your net worth by $25,000 per year on a salary of $50,000.

*note: I paid off over $21,000 of student loans in 22 months for an average of about $1,000 per month. If you don’t have debt, use this $1,000 per month for savings and investments instead.

**note: I realize you have to actually accumulate assets in the first place before you can glean any monetary payout from them. I started saving when I was still in school, before any of my student loan payments came due, so I had a small boost in this department. It’s ok to start from zero in this category — as you keep saving and investing, it will gradually stop being zero so there’s no cause for panic.

5 Steps To Increase Your Net Worth By $25,000+ Per Year

On my Ask-Me-Anything post, a reader asked me to expand on my plans to increase my net worth by $25,000 after I graduate from my MBA in 2015. I like when people ask me questions like this, because it’s one of those painfully obvious things I’m totally oblivious to. Please always feel free to email me any money questions you have, I do love to help!

What does increasing your net worth by $25,000 mean? It means that every 4 years your wealth will grow by $100,000. Every decade you’re upping your wealth by a quarter of a million dollars. If you’re out of debt, that means you’re banking 100% of this cash. If you’re in your twenties, doing this means you will retire a millionaire. See? Isn’t this cool? Don’t you want to do this?

How To Increase Your Net Worth By $25,000 Per Year

Step 1. Earn $50,000+ per year. I know this seems obvious, but you’d be surprised how many people think they can “get rich” on tragically small salaries. Saving 30%+ of your income is fantastic — but it won’t increase your net worth by $25K if you’re only bringing home $2,000 per month.

*I’m sorry if this is bad news for people that don’t make large enough salaries to aggressively grow your net worth. I do not have a magic formula to grow your net worth by $25K when you make $30K a year and have $28K of expenses. However, this doesn’t mean your savings efforts are for naught. You should always strive to save as much as you comfortably can, and if you feel like it’s not enough, you have to look for a way to increase your income to accomplish your goals.

Related Post: The Logistics of ACTUALLY Increasing Your Net Worth By $25,000 Per Year (includes a peek at my old paycheque!)

How I expect to achieve this: my starting salary at my first “big girl” job was $50,000 per year, and I received two raises in my time there before leaving to go back to school for my MBA. I’m hoping my MBA warrants a higher starting salary, but in my mind my worst case scenario is going back to the salary I left. I also operate under the general assumption that I will make progressively more money every year of my career, making banking $25,000 in savings easier as time goes by.

Step 2. Aggressively kill debt. If you’re carrying a balance on a credit card, their scary interest rates are eroding any wealth-building progress you’re making. Not only does eliminating debt increase your net worth, it makes it easy to further increase your net worth by other means.

For example, for every $1,000 you owe at 15% interest, you’re losing $150 per year. This means you actually have to pay $1,150 just to make your net worth budge $1,000. On the other hand, if you invest $1,000 at 3%, you’re gaining $30 per year. The net worth difference between a -$150 drag and a +$30 boost is $180. Essentially this means that a debt-free person is already almost $200 ahead for every $1,000 in the net worth game than a person that has debt.*

*sidenote: this is super simplified math for the purpose of example only. Real numbers will different due to things like compounding and monthly payments, but the logic still stands.

How I expect to achieve this: Frankly, ever since debt and I broke up for good in July, I’m trying not to go running back to its warm and comforting embrace, but if I do I’m getting the hell out of it the second I see an open door.

Step 3. Save like crazy. To save $25,000+ per year, you’re going to need to be willing to part with about $2,000 per month in the beginning. If this seems insane, I promise it looks a lot less intimidating broken down into different accounts and goals.

For example, a few of the things I’m working on right now include building a $10,000 emergency fund in my TFSA and saving $25,000 in my RRSPs. When I work full time, I’ll probably contribute $500 per paycheque to my TFSA and $400 per paycheque to my RRSPs. Assuming I get paid twice per month, this translates to $1000/mo into my emergency fund and $800/mo into my retirement accounts, boosting my net worth by $1,800 per month or $21,600 per year. Regularly contributing to my brokerage account will bring this total to my $25,000 savings goal.

How I expect to achieve this: These were my savings rates before I left my full-time job to go back to school for my MBA, and even though my income has been reduced, I keep the same proportion. In other words, I’m used to 40% of my paycheque going towards my savings goals and as long as I keep this percentage with a bigger salary, my net worth will grow accordingly.

Step 4. Don’t buy cars and houses. If you think my savings plan above looks crazy, it’s probably because you’re carrying a ridiculously huge car payment or a mortgage. I’m not surprised if you’re balking at saving the required $2,000 per month for a $25K net worth increase when you spend $600 per month on car expenses. I’m not saying don’t have a car, especially if you actually can’t be without one (and I mean ACTUALLY CAN’T BE WITHOUT ONE, not would-just-find-it-inconvenient-to-be-without-one), but I am saying don’t have a car if it’s going to keep you from building wealth. A car is not an asset, a car is a money-hungry black hole much like a child except quieter and can be left unattended for long periods of time without consequence. As for a mortgage, I don’t even want to touch this because I will want to go into super rant mode but I would STRONGLY discourage you from counting your home in monthly net worth calculations (annually or every 2-5 years makes more sense). I don’t really care if your house is worth $450,000 now and 6 months ago it was valued at $400,000. That’s unrealized gains, it’s not money in the bank. Furthermore, it’s subject to the market, and I’m not sure if you’ve noticed but the Canadian housing bubble is a real thing and we’re on the verge of getting f#$%ed. Sorry, guys. Lastly, making your monthly mortgage payment is doing very, very little for your net worth in the early years of home ownership since the bulk of it is going towards interest. You are running on a hamster wheel of a false sense of progress chasing a dangling carrot that is probably laced with cyanide. If you don’t believe me, ask an American what it was like.

Full disclosure: I was born without the gene that makes all bright-eyed and bushy-tailed millennials reach for the holy grail of “owning a home”. I know that eventually I will grudgingly take on the burden of a mortgage, but it will be in my thirties and  because it’s the only way I will be allowed to own a dog since renting with pets is basically impossible in my city.

How I expect to achieve this: I have no plans to purchase a car or home anytime in the next 5 years, because those are just things I don’t want. Over the long term, even if I subscribe to car and home ownership, I will never count these items in my goal of increasing my net worth by $25K+ year over year. I will count them in my overall net worth calculations (in a seriously underestimated way) but they will have no bearing on the actual progress of increasing my net worth each year.

Step 5. Invest in income-generating assets. This means use your money to buy things that make you more money. I try to keep a relatively balanced portfolio, and I’m partial to dividend stocks. More often than not, when I purchase a new investment, it will generate a monthly or quarterly payout (with the exception GICs and some mutual funds, which pay out annually). I always reinvest this income into more income-generating assets. The goal is to maximize passive income to relieve some of the net worth boosting duties of your salary. In my mind, the more money you can get without working, the better.

How I expect to achieve this: I started investing in stocks a few years ago, so my portfolio has had some time to start to pull its own weight. My current annual dividend income is a few hundred dollars per year, and it keeps growing. The more passive income I earn, the less I’m required to save from my salary in order to meet my goal. For example, in Step 3 I outlined a plan to save $25,000 per year, but if I’m earning $1,000 in dividends per year, I only have to save $24,000 per year and my net worth will still be increasing by $25,000 annually.

And there you go! That’s how I’m doing it.

What should your net worth be at 30?

The title of this blog post is a search engine term that led to my blog. It’s a good question! And one I feel I should attempt to answer in case future googler’s are led here by the same.

Except I don’t know what your net worth “should” be at 30. I don’t even know what mine will be, only what I want it to be.

Up until this year my personal net-worth goal for 30 was $100,000. Now I’m thinking I should aim a little higher. The challenge in setting net worth goals is that it can depend on more than how much you save or how much debt you pay off. Assets like stocks or houses can fluctuate in value — sometimes in a good way, but also sometimes for the worst.

On another note, I’m not sure what net worth you should strive for because I’m generally a huge advocate of not worrying about what everyone else is doing.  If you’re looking at everyone else, you’re going to lose sight of yourself.

Finances are generally a pretty quick and easy way to pass judgement on another person’s success and values, even if some of the circumstances were out of their control. For example, it will be easier for someone whose parents paid for their university education to build net worth than it is for me, because they get to start without debt and I started down $20,000. On the other hand, it will be easier for me to build net worth than someone at a lower starting salary or raising a young family, because I’m single with a good income. But when you just take a quick glance at someone’s net worth, generally you’ll absorb only the number and not the circumstances: “wow! up $250,000 already!” or “negative $50,000? Are you kidding?” — even though the first might just be riding an inheritance and the second is a medical student.

I found the statistics of the relationship between net worth and profession in The Millionaire Next Door very interesting. I suggest you check out the book if you haven’t already. Basically it puts net worth in the context of earning power, and consequently people that society perceives as “rich” are actually usually pretty horrible at building wealth (ie. doctors) and others with average jobs can be very good at building wealth (ie. teachers).

I think long-term net worth goals have to be a mix of what’s realistic and what you’re willing to work for. At this point, I still don’t have a clear idea where my career is headed, but I do understand my spending and saving habits. I know I’ll come out on the the other side of $100,000 but by how much will depend on the decisions I make in the next 4 years:

  • when will I buy a car? What kind?
  • how many international vacations will I go on? Will they be frugal or luxurious?
  • what kind of home will I buy?
  • will I have children? If so, how many?
  • will I get married? How much will I spend on the wedding?

(answers: 2014, Mini Cooper, 10, frugal, 2 bedroom condo, yes, one, no, $0 — jk… sort of)

My advice is to not worry about what your net worth should be and just try to make it as high as you can. You’re not saving for anyone but yourself. It is your financial security, your financial future, your financial life on the line — no one else’s. Only concentrate on what you can do, and forget everyone else.

 

I’m going to be a millionaire!

Ok, before you all get excited and think I won the lottery or something, know that I’m talking 40 years from now. I was staring at my Net Worth goal page and pondering the feat when it occurred to me how beneficial increasing my net worth every year is really going to be.

Imagine I just stay on this track of a $25,000 net worth increase every year from here on out. No more, no less. By age thirty I’ll be up six-figures. In 20 years I will have jumped a half-million dollars. By retirement, I will cross the seven figure mark.

Seven figures. One million dollars.

Then I had a “holy shit! I’m going to be a millionaire!” moment. It had never really occurred to me before. When I put my retirement savings numbers into those pesky RRSP calculators, it always spits out something with only five zeros after it. Which is fine, but I never really saw myself in millions — but now I realize it’s realistic. I would even argue that it’s likely.

This of course hinges on increasing my net worth by $25,000 every year. I think that’s doable. In my head I was going to up the figure every year: maybe $30,000 in 2013? Or dare I shoot for $40,000? Manageable figures, anyway. Numbers that seem plausible, based on climbing the corporate ladder and growing my personal wealth.

It is possible there will be years of lesser net worth growth though. If I ever take time off from the working world to have a family, $25,000+ in annual asset growth is potentially unattainable. Additionally I can’t expect to make it through the next four decades without another stock market dip (crash?) or two. I have no idea what financial hardships I’m going to have to weather during my lifetime, but I’m definitely not going to pretend they’re not coming.

Lately I’ve found myself back into my competitive spirit that lounging in France previously took out of me, so I have to be careful not to burn out, but I have to admit, the first thing I thought of when I saw “one million” was “why not two million?”

And then a really dark crazy ambitious side of me countered, “why not five?”

But then I was like, “what the hell am I going to do with five million dollars?!”, and I stopped myself, because that’s just crazy and I would be like one of those people on that hoarders TV program, except I’ll just have been hoarding money. Crazy isn’t cool.