I Just Lost So Much Money - Net Worth Update
Well everyone, we made it. We are one month into this adventure of charting my net worth, breaking down market news and just generally making finance more approachable. I truly believe that making finance more interesting and easier to understand is a critical building block for society and can give anyone a leg up in life. With that, let's talk about how my leg up in life was cut off at the knees over the past thirty days, and why I'm not overly concerned.
My Net Worth Update
As you can see from this screenshot from my Personal Capital account, I've had a wild and crazy month. My net worth has whipsawed up and down and now is starting to resemble the part of Tower of Terror where your stomach ends up in your mouth. There are three key reasons my net worth has taken a dramatic tumble in the past month:
A dramatic homeowner emergency
Purchasing a car
A cooling housing market
Let's jump in.
Preparing For The Worst: Why You Need An Emergency Fund
I'm a fan of Warren Buffett's cash analogy to oxygen: "You always want enough of it around, but too much really isn't good for you." While I one day aspire to have "too much cash" as a real issue in my life, the first part of the adage currently speaks to me. Having enough cash on hand is the lifestyle equivalent of Ambien. Nothing will help you sleep better at night than having enough cash in the bank to cover an emergency or two. In my case, that's exactly what happened.
A few weeks ago, my HVAC unit in my house decided to leak and break into pieces. After waking up in a pool of sweat, I called out the repairman who told me this wasn't going to be cheap: $6,000 not cheap. But my wife and I had prepared for this. We sat down, evaluated our finances and decided to take advantage of a financing offer through the HVAC company: $3,000 in cash up front, with another $3,000 financed at 0% over 18 months, working out to around $170/month. Doable for our monthly budget. And you know what we did that night? We slept soundly. Why? Because we have an emergency fund that was prepared for emergencies in this range. Now, could both of us lose our job and we'd be fine for a few months? Not likely. But we could handle something like this. Sure, our net worth takes a hit for a while until we build it back up, but that's what savings are for! If something like this happens, the worst thing you can do is go into debt by using a credit card to cover the costs. Make sure you have some cash on hand for things like this.
Purchasing A Car: Would Not Recommend
The reason this is a contributing factor to my net worth decline this month is because I'm an idiot. No, seriously. I have an adage in my own life: "If it drives, flies or floats, lease it." That's because vehicles are almost ALWAYS a depreciating liability. Think of a car like a time bomb, where it keeps exploding with gas, maintenance and wear and tear. This is why I have always leased my cars. I've now been driving for 13 years and have had four cars: three Honda Civic's and a VW Tiguan. Every car has been a lease, until now. This is my first SUV, and I got used to the size and the usefulness. It's a good car, and the lease payments were pretty manageable at less than $300 per month. So my plan is as follows:
Buy the car through an auto-loan and have a manageable monthly payment
Pay the car off early
Trade it in towards the price of the car I really want in a few years: the Tesla Model Y
However, there were a few things I was not aware of when you purchase a car. First, getting two massive corporations in a car company and a bank to speak to each other is a borderline herculean task, and I honestly feel like nothing can beat me after I set up that little rendezvous. Second, taxes! Taxes are an absolute nightmare when you purchase the car, and that was a little $1,000 check I wasn't planning on writing. Add that to the car loan now being added to my overall net worth statement and you have a recipe for getting crushed.
The Housing Market Is Cooling Down
Last week, I wrote about several reasons why the housing market was so hot in the United States. Effectively, it comes down to low interest rates, lots of money in the market and an extremely high cost of goods and labor to build new homes. However, the pent up demand does seem to be slowing slightly, and that hits homeowners like me in the wallet. I base my home price on the often unreliable Zestimate, provided by Zillow, but it provides a good yardstick for my area. My home price in the past 30 days has fallen from an estimate of $440,000 down to $419,000, good for a pretty sizable drop in my net worth statement.
Here's Why I'm Not Concerned
Let's get this out of the way now: seeing a drop in your net worth as steep as the one I just endured will cause your heart to skip a beat. It just will. Seeing a decline will make anyone panic for a moment, but that's why you track your net worth in the first place. You need to be able to track your inflows and outflows, see where the gaps are and plug them as quickly as you can. It also allows you to track individual parts of your wealth to see what's headed in the right direction. In my case, I have a few things going for me.
My Savings Are Still Going According To Plan
One of my first ever posts on this blog was a review of the mobile-based budgeting tool "Albert." Keep in mind that I am not endorsed by, or paid in any way by, this company. Now that I've said that, I can also say that this app is absolutely magical. Through everything: the overspending, the dip into my emergency fund, my wife switching bank accounts and interrupting our monthly cash flow for the month of July, Albert has helped me overcome and save over $1,200 from the end of June through the end of July. This has kept my savings plan on point, again allowing me to sleep pretty soundly at night.
Never. Stop. Investing.
The stock market can be a scary place, and that's actually something I'm working to fix through my articles on this site. But if you take away just one thing from this blog the entire time you consume it, remember this: once you have a comfortable amount of money in savings, NEVER. STOP. INVESTING. Here's why:
I've gone through everything I listed above, and my net worth has suffered for it. But my investments have increased. How?
I never stopped contributing to my 401k. I base my budget every month on the net pay I receive that already has my 401k contribution taken out of it, so I don't miss it. I'd also be missing out on my 6% employer match, so I'd be doubly losing if I were to stop contributing.
The same principle above also applies to my HSA. This triple-tax-advantaged account I wrote about this week is meant for medical bills, but can live in the market until you retire to cover any medical expenses. I commit $100 per paycheck, pre-tax, to this account.
I have kept up my taxable contributions, which is a good thing and a bad thing. Really, I should be contributing to my Roth IRA (more on that here), but I have a very specific buying strategy that I have continued to execute as an investment in my future. I'll write about that at a later date, but suffice to say I'm looking to keep growing these accounts on a weekly basis.
What Are My Next Steps?
So looking at this backpedal in my finances, the most natural next step would be a "batten-down-the-hatches" strategy, and that's somewhat correct in the near term. I'll obviously need to pull back in some spending categories, like dining out or leisure activities, to recoup the money we pulled from our emergency fund to cover the HVAC. My next step after that is to...maintain.
Hear me out: we don't have massive consumer debt, in the most common sense. My wife and I both have a mortgage and a car loan. Each of these have interest rates under 4%, so we're not in a huge rush to pay these off. Reason being, we can make more in the market than we can in paying our loans off early. If our monthly budgets get stretched too thin then sure, we can go ahead and pay off the smaller loan like the HVAC in order to bring the monthly number down, but any financial expert will tell you if you can make more investing the money than you can paying down the debt, then invest and make the minimum payments! And if you want to pay it off early? Take those investments and pay that shit off. It isn't rocket science.
Let me know what you think of my net worth update from this month! Do you like these recaps? Do you hate me? Sound off in the comments below! And don't forget to sign up for my email list to get these in your inbox as soon as they publish. Thanks for reading, and see you next month in the next update!