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.

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.

Net Worth and Income Goals for 2012

Now that I’m a grown-up, full-time career girl, I feel like it’s time to start setting some income goals.

I have a number in mind for my goal gross income for 2012 but I’m still trying to figure out if it’s unrealistic or not. My salary at work is fixed, so that’s pretty straightforward. I’m bringing in some regular additional income tutoring, and freelance writing opportunities are coming up which is awesome, but difficult to estimate how lucrative they’ll actually be. Investment income is increasing, but I think it will be years before it generates anything truly substantial. All in all, I have a lot going on that make the number in my head possible, but I hate the idea of failing SOVERYMUCH I feel a great mix of terror with all this excitement =p

Nevertheless, I’ve come up with a figure, and I’ll be tracking my gross income in that context from now on. I’ll try to share my progress, and then maybe do a big reveal at the end of the year if I make it — but if I don’t make it, we’ll all just pretend none of this ever happened and I will tell none of you about the days I will spend crying in my bedroom in defeat. If I come up something menial like $500 short I will lose my mind with frustration — it’d be worse than being $5,000 short!

As for net worth, my plan is to cut my student loan in half and max out this year’s TFSA contributions. This will result in about a $15,000 net worth increase. I’m going to go ahead and get super ambitious and say I plan to increase my net worth by $25,000 in 2012. I decided this before it occurred to me that I’m planning a very expensive vacation to Africa in July. That kind of scared me because if I’m going to go on a ~$5,000 vacation AND increase my net worth by $25,000 that means I really have to account for $30,000. So I’m hyperventilating a bit, but I still think this is possible! I STILL BELIEVE IN ME! (that was said in a triumphant, passionate, I-can-do-anything voice, preferably while standing on a chair, in a room of bewildered strangers).

Because of the trip, I’m going to go soft on myself for the Net Worth goal and not spend days crying in my room if I fail. I mean, if I boost my net worth by $20,000 it’s still going to be amazing. Maybe the stock market will undergo rapid recovery and growth, and take some of the pressure off me…

I will make charts and maybe a tab at the top there to track this (update: HERE THEY ARE!), and all of you may encourage or mock me at your leisure. 2012 is my money year!