Monday, July 30, 2012

New net worth update categories

From the next month I will add two new categories to my monthly net worth updates: "Personal savings rate" and "Millionaire month". I have tracked both these for a couple of years for myself already. They are objective and measurable benchmarks that will hopefully help me to reach my goal of financial independence faster:

Personal savings rate:
This should be a familiar expression for the average reader of this blog, but let me define it precisely: Savings rate = Money saved / Net income from all sources. To avoid large short-term flutuations I will use the sum of the last 12 months' total savings and net income to calculate it. My current savings rate is 58 percent, and the long term goal is to keep it between 60 and 75 percent. The household savings rate, according to OECD, varies greatly from country to country. For instance in 2011 it was 8.0 in Norway (my home country), 4.6 in USA and 11.0 in Germany. Some countries even have a negative savings rate. How early you can retire is closely related to your savings rate, as described in this excellent blog post from Mr. Money Mustache.

"Millionaire month":
This is a realistic and conservative estimate (not a goal) of which month I will reach a net worth of $1,000,000. It is based on my current assets and liabilities, expected future earnings and expected return of my savings (based on previous returns). I track my net worth in a very complex and detailed spreadsheet with one row for each month up to age 75. In this spreadsheet I can any time see which month I expect to become a dollar millionaire. If I insert new numbers for future earnings, interest rates, consumption etc., the millionaire month will change at once. My current millionaire month is July 2028. This means that I am now "on track" to becoming a dollar millionaire in 2028. This estimation will likely become more accurate the closer I come to reaching millionaire status.

What is your savings rate and "Millionaire month"?

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