The Money Commando

Net worth – July, 2020

(I’m running a bit behind on my monthly updates, so please bear with me as I get caught up over the next few days.)

Each month I publish our net worth on this blog. The reason for making our net worth public is to not only hold myself accountable, but to provide a record so I can review my progress over time. I’ll give a brief analysis on our results for the month and discuss any changes I’m thinking of making.

I track our net worth in both the “real” numbers and the Money Commando True Wealth Index (or MCTWI for short). The MCTWI is a way to provide a more stable and “true” valuation of the stock market by adjusting for valuation (that is, PE ratios that are higher or lower than the long-term market average). As a reminder – the MCTWI tells you how much your stock investments would be worth assuming “normal” valuation rather than the current valuation in the market.

The net worth report below includes an adjustment for the Money Commando True Wealth Index (MCTWI). The MCTWI for July, 2020 is 75%.

If the market was suddenly revalued at the long-term average of 15.78x earnings rather than the current 20.93x earnings, then your stock market investments would be worth roughly 75% of what they are currently worth

Without further ado, here is our net worth report for July, 2020:

Our net worth for the month was up 2.5%, which underperformed the S&P’s return of 5.64%. Our mix of cash, real estate, and equities means that our performance should be less volatile than the stock market – we should underperform when markets are up but outperform when markets are down.

Let’s take a closer look at our assets and liabilities.

Assets

Brokerage (+4.5% Month, -4.0% YTD):

Solid performance this month, and we continue to recover from the downturn in March.

Retirement Accounts (+1.3% Month, -1.0% YTD)

This includes a 401(k), two IRAs, and two Roth IRAs (one of each for my wife and me). The only account we are currently contributing to is the 401(k), as we aren’t eligible to continue to the IRAs.

Of course, any withdrawals from these accounts will be taxed at our marginal income tax rate, which means we should probably be valuing these accounts at a ~30% discount.

I’ve already contributed close to the yearly maximum in my 401k, so that’s a big part of the reason this account is only down 1% for the year.

529 accounts (+6.4% Month, +13.9% YTD):

Not much to say here – we are contributing $500/month/child into these accounts, and given that our kids are 6 and 4, we are approaching the point where we have enough money in these accounts and it will make sense to stop contributing. Given their ages, it’s reasonable to expect the money to increase by 3x by the time they go off to college, and that would result in roughly $90k/kid.

My advice to clients is to fund your 529 accounts so they’ll cover roughly 75% of your kids’ projected college costs. The problem of course is that nobody knows how much college will cost when their kid goes to school, or what school the kid will go to, or whether or not the kid will get any scholarships. As a result, it’s best to slightly underfund the accounts, and there are penalties for pulling the money out for non-education related expenses.

Assuming both of our kids go to college, both accounts will be completely liquidated in about 20 years. Based on my calculations, these accounts should pay for 90%+ of the total 4-year cost at a state university. The remaining amounts will be paid out of our then-current cash flow.

Checking (+7.9% Month, +171.9% YTD):

Our goal is to keep about $50k in cash in our checking account. This is due to an abundance of caution. I work in an inherently unstable field (sales) and my income varies widely from month to month. Keeping a good chunk of cash in our checking account helps me sleep well at night, and given the events of the last month, I think more people are understanding the value of cash.

We are at our $50k balance, so I’ll start taking the excess above $50k and moving it to our brokerage accounts to be invested.

Private investments: unchanged

We have 2 separate private equity investments. Since there’s no way to value these investments I will continue to keep them valued at my initial investment amount.

I’ve heard that there might be a liquidity event for one of my private equity investments later this year. It’s nothing other than a rumor at this point, so I’m not going to adjust my valuation until it becomes real.

Stock options: (+11.9% Month, +69.2% Year)

These options vest quarterly and a new block of stock vested on July 1st. I’m valuing my stock options at the price used for the most recent liquidity event. This block of options has a strike price substantially higher than my previous blocks of options, which means the valuation is lower (this block was worth $6,125 and the previous 4 blocks were worth $11,375 each.

The next block of options will vest on Oct 1, 2020.

Rental properties (+0% Month, +4.4% YTD):

We update the value of our rental properties at the end of each calendar quarter.

No update this month.

Primary residence (+0% Month, +4.8% YTD):

We update the value of our primary residence at the end of each calendar quarter.

No update this month.

Total Assets (+2.1% Month, +1.0% YTD):

Our assets are up about $77k in 2020. We’ve completely recovered from the downturn in March and are actually $77k richer for the year. Sweet.

Total assets after adjusting for MCTWI (+1.8% Month, +1.7% YTD):

This is a better indicator of our performance. It’s interesting that when you adjust for changes in market valuation we are up by over $100k

Liabilities

Just a note on the numbers below – since these are liabilities, a negative number (reduction in liability) is good, while a positive number (and increase in liabilities) is bad.

Credit cards (-266.5% Month, -111.9% YTD)

We pay our balances in full each month, so the ebb and flow of our balance is more reflective of when our payment is made than anything else.

We have a negative balance this month because I accidentally made a double payment on one of our credit cards.

Rental mortgages (-0.2% Month, -1.9% YTD)

We are chipping away at these mortgages, and we’ve been paying off about 0.2% of the balance each month.

At the rate we are paying off our mortgages we are 20+ years from retiring these loans.

Primary residence mortgage (-0.2% Month, -1.4% YTD)

Although I don’t really consider our house to be an asset, I definitely consider our home loan a liability. I think it would be difficult to retire early with substantial mortgage payments hanging over our heads. We need to have this paid off before I can really consider retirement.

I’m currently working on refinancing our loan, which will reduce our interest rate by 150 basis points and reduce our monthly payment by approximately $850/month.

Total liabilities (-0.3% Month, -2.1% YTD)

We continue chipping away at our liabilities. Although all of our debts are “good” debt (mortgages on income producing property or our primary residence), I’d still rather have no debt, and I’m eagerly looking forward to when we start paying off the loans. The smallest loan (for one of our rental properties) should be paid off in 5-7 years, and after that the rest should start falling faster.

Total net worth (+2.5% Month, +1.6% YTD)

Our net worth was up almost $160k for the month. Sweet!

Conclusion

Nothing too exciting this month – just watching our investments do what they are designed to do – throw off passive income, which we reinvest.

Based on our performance so far, it’s possible that our net worth will hit $7M by the end of 2020.

How did everybody else do this month?  What’s your asset allocation, and how does it compare to your ideal allocation?