Why would anyone want to compete publicly with regards to savings rates and net worth growth? The short answer is accountability. It is easy to publish goals (or even just set them privately), but it is much harder to have to explain the progress on a monthly basis. I like the idea of sending in my numbers each month as it provides a mechanism to keep me honest (it also has created a community to challenge and support each other).
I set my goals based on 2014 results and a projection of what I think I know about what will happen in 2015 (income, tax refund, spending, etc). The challenge was to try and factor in the unknown like car or home repairs, unanticipated mini-vacations, and other spending and saving variables. Once I came up with an amount, I then subtracted a small amount for being too optimistic (call it a fudge factor). For some reason, I reduced the net worth goal by less than the savings rate goal.
I ended up with a net worth increase goal of 30% and a savings rate goal of 65%. I should probably explain a little bit more about those numbers.
My Net Worth Goal
The net worth increase goal is fairly straight forward. It includes increases to assets (includes house and cars, but not any other physical items), mostly from contributions to retirement and investment accounts. There is also a modest expectation of about 6% growth on current balances. That is my conservative estimate for the year, it is not dictated from the Moneystepper spreadsheet model. Also, I actually expect my cars to decrease in value by almost $5,000. Finally, I predict my house will appreciate in value by 1.25%. My home equity will increase by a lot more due to paying down the principal.
On the flip side of the net worth calculation is the Liabilities section. This includes all debt like mortgages, auto loans, credit cards, and student loans. I plan to eliminate the last bit of my wife’s student loans in the first quarter of 2015. Aggressively paying off debt actually increases your net worth because there is no longer a drag on the Assets side by owing money. We also installed solar and using our tax refund will eliminate most of the 0% solar loan from last summer. The rest will be paid off monthly through the end of the year. In 2016, I will have a much larger amount of funds available to invest for the entire year.
My Savings Rate Goal
Now on to the savings rate goal of 65%. This one is a little bit tricky, but it includes a lot of pre-tax savings. My large pension and 403b match make it look like my savings rate is much higher than my paycheck would imply. That is okay, because I am only comparing to myself, so as long as I consistently calculate it I can see my success (or failure) over time. My main driver in the savings rate is to continually increase my pre-tax savings in a 403b and 457b plans. Both can have up to $18,000 in contributions each year.
The Moneystepper savings rate model also counts the principal part of debt repayment as savings. I am okay with that and, again, it’s about being consistent. As long as I use the same formula, I can see my progress over time. Including the solar and student loan payments, plus over 15 year mortgage (much higher principal payment versus a 30 year mortgage), really push up the savings rate.
In retrospect, I probably should have set the savings rate at a 60% goal for the year to give myself more of a cushion. I didn’t leave much room for discretionary spending (like nights out or an extra weekend get-away) or much for repairs as they are bound to happen. I know just realized I also included a pension contribution that does not officially occur until September or October. I need to decide how to handle it (should I count the expected accrual or not?).
My Awesome Group
My Group F was renamed Group Freedom as we are all working towards financial independence. Mrs. Maroon and Mr. Captain Cash have both already been talking about the challenge and I think we will all get along and support each other so our group does the best! I look forward to trading ideas and being competitive.
It looks like we all have similar net worth goals for 2015, but Mr Captain Cash has a much higher savings rate goal than us other two. Impressive!
I would lay odds on achieving the net worth goal fairly easily, but I might have a little trouble getting to the savings rate goal for the year. If I only hit 60% on the savings rate would I consider it a failure? Absolutely not. I would consider it a success!
Check out my podcast talking about the challenge, hopefully I did not embarrass myself too much.