Sunday, 7 June 2015

Retire Early : Increase your Networth

The holy grail of early retirement is to push your networth up as quickly as you possibly can to help meet your retirement goal.  I have earlier described how to arrive at your networth target. Today I will focus on the efforts I have put in over the years to build out my overall corpus, and the results of that rather arduous exercise.  I say arduous because it certainly has not been easy going to try and watch your networth grow slowly in spite of the challenges you face everyday.  Here is a description of my journey so far, and some tips on how I have gotten here.  Read on, and feel free to provide me ideas and suggestions on what I should be doing going forward.  I certainly need all the help I can get to realize my dreams.

I have been on this early retirement journey for several years now, but I only started monitoring and tracking my networth since the middle of 2009.  This is clearly mistake number one.  For folks starting on this venture, or planning to get started, the first thing you want to do is get a handle on your total networth and then track it periodically.  Don't focus on it too much, or agonize about it every day, or obsess about it.  However, you MUST know at least on a yearly basis (if not quarterly) what your overall corpus is heading to.  Think of it as a number that gives you a sense for if you are heading in the right direction, and more importantly if you are getting there at the right pace. Remember there will be several twists and turns along the way, unforeseen large expenses, weak markets, changes in job, poor investments, and what not.  Through all this your networth is the only true metric that can help you chart your future course.  

For the purpose of this discussion, the corpus that I am discussing here today, does not include the home that I live in.  It is generally accepted practice not to include your flat/apartment or home in your networth.  Of course if you are still paying off your home loan, it needs to get factored into your overall liability, but once the home loan is paid off, I do not include the value in my asset column. You can and must of course include any investment real estate that you own as an asset.  Also please do not be including things like cars in your asset calculation.  These are more like consumption depreciating assets, that do not quality as a real asset when it comes to a networth calculation. Remember to include any loans you have taken, credit card debt etc into your liabilities.  The bulk of my assets/investments are financial instruments like mutual funds, direct equity, tax free bonds, GILT funds, and lately the easiest way to track these has been through the NSDL CAS statement that I have written about before.

So here is how my networth has grown (or in some years stayed flat or even reduced) over the last 6 years. 

Since I started tracking my corpus from mid-2009, I have bench-marked my networth numbers to the starting figure in July 2009.  About every month since then, I have jotted down my networth and shown it here, normalized to the starting value.  There are some months (particularly in 2010-2011) when I was not disciplined enough to jot down the number, and so you see some gaps in the graph above wherein there are no data points (so the dots appear spaced out) 

From the graph above you can see that I seem to have really struggled from 2010-2011, with some improvement in 2012, slightly better in 2013, and much better progress in 2014.  Now remember that I am in my accumulation phase, so my total corpus grows as a result of both investment growth, and fresh savings coming into the investment pool.  So the performance of the graph above is a function of my savings across the last 6 years, as well as the performance of the underlying investments.  

As I mentioned before, the bulk of my investments are in financial instruments, and more specifically linked to the equity markets, so you will see a strong correlation between the stock index behavior and my networth growth (or the lack of it) over the years

The perspective I want to share with you today, is not one of comparison, or performance targeting. All I want to encourage you to do is to start tracking your networth.  It is a very simple exercise and can be automated to a great extent.  Please don't measure as many data points as I did (almost once a month), it is not worth the effort.  Tracking your total networth once a quarter, or every half year is sufficient.  Use consolidated statements as much as possible to make it easier to collect all your assets and liabilities in one place, and jot down a final number.  Over the years it will give you a good sense of the pace with which your corpus is growing, and chart your overall financial health through its ups and downs.  You will also get a clear picture of where you are right now, and how much longer it is going to take to reach your destination .. FINANCIAL INDEPENDENCE.

Now I still need to analyze the raw data I have shared here, in terms of performance with respect to the index, and crystallize my learning through the market downturn, and subsequent market resurgence in 2014.  In the meantime, do send in your questions, comments, or clarifications.  All are welcome, so we have a good discussion and hopefully learn from each other.

1 comment:

  1. Very interesting article. Though i must say its extremely hard to imagine early retirement, maybe because of family and kids , thus too much liability. But if its definitely gives to think about one's net worth and i think will help in the long run even early retirement is not on your mind. I have bought tata aia life's Smart growth plus plan, it offers flexibility in choosing policy term, has good policy returns and tax benefits u/s 80C & 10(10D).