Sunday, April 20, 2008

reader q&a; on net worth gains

A reader, yohann (from France) asked a question in response to my latest net worth post from March of 2008:

could you please provide more info about how you did it ? I saw that you had some 6 000$ increase per month when going from 83k to 95k, was it only salary?

On the particular update that johann was referring to, our net worth did increase by about $12,000 in 2 months. In valuing our home within our net worth I try to keep an eye out for the selling price and time on the market of very similar houses in our area. Our neighbourhood is actually made up of bit of a monoculture of homes, which likely makes this valuation more accurate. I use comparable homes and I attempt to be very conservative when valuing our home. In this particular update I increased the value of our home by $6,000. Therefore this made up half of the increase yohann was asking about. Real estate in my area had two very good years in 2006 and 2007, however I expect my home value to remain fairly flat over the next few years.

During this same period we were able to save about $6,000 for our non-registered portfolio. It looks as though the market return during that period was likely modest to negative so that did not help out whatsoever. Our normal savings for our other registered accounts, as well as our traditional slow and steady debt reduction also contributed. It's interesting to look at the period in question when compared to our latest update (March of 2008) which yielded a paltry $1,193 increase in net worth.

Generally, going forward our net worth gains month by month (reported bi-monthly) should be attributed to a few factors:
  • We Spend Much Less Than We Earn (probably half, including bonuses, etc.)
  • We Save & Invest the Balance
  • Our Investments Should Grow in Value Over Time
  • Our Investments Pay Us Income (dividends & distributions), Which in Turn get Re-invested
On another note this is the first post on the moneygardener which I have actually written outdoors! There is nothing like those first few beautiful Spring days!


Yohann said...

Thanks, it is clear now...

I am renting a flat, so i was not taking "home" into account of my net worth...

but... it shows that a home can be a nice leverage tool when the market is up.

anyway, i would be scared to value a home every two months... i think it can be desastrous if the maket starts to drop...

thanks for the quick answer, i do like that blog... good job !

MG said...

Well, the disaster, and worst case scenario for real estate value is likely occuring as we speak in the U.S. As far as net worth goes, I fail to see how valuing your home, is any different from valuing a portfolio of dividend paying stocks.

pitz said...

mg, your portfolio of dividend paying stocks is marked to market in a *liquid* market on an almost minute-by-minute basis.

Your house is only really marked to market only once -- when you actually go and sell it.

IMHO, you should be valuing your house on your balance sheet based on the (imputed) *rent* it provides, discounted for its service life and the cost of a long-term mortgage. In such a context, I doubt your house's value has changed significantly, in fact, with higher mortgage rates, this would imply a higher discounting factor, and hence actually a lower valuation.

MG said...

I am reasonably confident that I can likely come within about 5% of estimating what my house would sell for. Hence I'm marking to market...