The Dream of One Million
One million is such a nice, round number. It is entracing, magical and delightful. Although a million isn't enough to be rich, and many people believe that it is not even enough to retire on, there is still a sense of WOW to being a Millionaire.
So why is that? Well, the plain truth is... most of us are not millionaires.
YET :)
I will post my official numbers tomorrow or the next day, but it looks like I will be two-thirds of the way to one million dollars at the end of this month. I love milestones like this because they make it more real and possible. It's such a long journey to get from zero to a million and we need all the encouragement we can get.
I especially like this milestone because I now need exactly 50% growth to reach one million. If I go through my assets line by line and come up with a plan to grow each one by 50% I will have one million dollars at the end. Sounds possible, doesn't it?
Here is a simple breakdown of how this could work...
I have my house valued at $500,000 and my mortgage at just over $260,000. The net value of my house is what I need to increase so 50% is $120,000. If I pay down my mortgage by $45,000 and increase my home value by 15% or $75,000 I will acheive this goal. A 5% per year increase is not unreasonable to hope for and my regular mortgage payments over the next three years will take off $17,141.63 so this goal is already on schedule for a three year target, or if the market goes up at 3% per year, then I will hit a five year target.
About $355,000 is in the stock market or mutual funds (that are mostly equities). If the markets return 8% this will be up 50% between years 5 and 6. If it returns 10% per year then 50% will arrive between years 4 and 5.
The tricky part is to acheive growth on the rest of my assets, which are things like bank or money market accounts, receivables, personal property and miscellaneous smaller investments. There is basically $72,000 in this category so a growth of $36,000 is needed. I have concluded that this is the part I need to grow by saving. This is $12,000 per year for 3 years or $6,000 per year for 6 years.
So I think that if we don't start into a bear market (which is possible so I'm not counting it out) and if real estate makes continued but modest gains and if I save $6,000-$12,000 per year, then I could very well become a millionaire in 3-6 years time.
Cool.
Yeah, I know it's full of ifs, but it is also full of realistic possibilities and the time frame is not ridiculously long. And my history is of saving more than the amounts I have projected, so there are other ways to make the returns needed even lower. I'm very excited about this... I'm going to be a millionaire some day soon!
6 comments:
MD
The really great thing is how quickly it seems to grow at this stage. That exponential thing really starts to show up with a portfolio > $500K
I remember the day I showed my wife our NW was > $1 M. We celebrated with MacDonalds :-)
The day our NW was > $1 M and we had no more debts was a red-letter day for us. We celebrated by sleeping (we had kids at the time).
The day our NW was > $1 M and I was no longer counting our Principal Residence was the day I started contemplating early retirement.
All within 7 years.
Good luck.
Q
One thing I have real trouble with when trying to evaluate my own net worth is the whole house value thing. I have been using the accounting method called "Lower of Cost or Market" or LCM (the basic idea is that you value an asset at either what you paid for it or what the market says it is worth right now, whichever is lower) which is how publicly traded companies are supposed to value their investments and then I add the cost of any renovations/maintenance I have done on the hosue. Of course this probably undervalues the house but I think that is better than overvaluing it.
I have recently sold my house that I have lived in for 8 years. I put about 20% of what I paid for the house into the house in terms of renovations and maintenance over those 8 years and I sold it for about 60% more than I paid for it. Now the effect of this is that once I move my net worth is going to jump by something like 15% just because I have realized the value in the old house and put it into a new house and now the new house is valued at pretty close to market value. If I used the market value assessments of the houses my net worth would have actually gone down a little bit because the new house is actually valued about 5% less than the old house was valued at even though I paid about 3-5% more for it...
Q,
I am looking forward to the momentum starting to come from what I own instead of what I earn. Thanks for the great stories!
Oxcc,
Including my house at market value doesn't bother me. It's just one way to measure and I know that there are others. Similar to Q's stories above, I plan to make a future goal of $1M excluding my house. But I have to walk before I run...
MD:)
I think you are right, the ideal way is to not even include a house that you live in as part of the new worth calculation. You just never know what the housing market will do and since you are living in the house anyway it isn't like you are going to sell it...
Anyway, the end goal of $1M in liquid assets is probably a good long-term goal with some other shorter term stepping stones along the way...
Qcash is right. A 5% jump in net worth is a heckuva lot more impressive when you're worth $1-million than when your emergency fund goes from $1000 to $1050.
That million is a nice round number for what it represents -- the higher your base is, the better my chances of living solely off the passive income it produces (dividends, rents, etc.)
You're closer than I am, though. :)
I have had various discussions about the inclusion of your PR in your NW. I do include it when I am calculating my NW (makes me feel better ;-) but even there I list it at the price I purchased it. For no other reason than any potential gain in value is not one I am going to realize soon because my wife and I intend to be here a very long time. When it comes time to downsize and move out (quite a few years from now) then it will be an added bonus (I hope).
When I started planning on taking early retirement, I stopped including my PR in calculations. Mostly because I was determined to have a specific cash flow at retirement and my PR was not providing any cash flow (sucking it out, yes, but not providing any). So when I want to see how well my overall portfolio is doing, I have a more accurate picture.
Oxcc, I haven't heard of the LCM method, but I guess that is what I have done in my NW statement.
Q
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