Monday, May 5, 2008

One year of progress: charting the trends

In last week's post of my April month-end status, I noted that, for the first time since I've been tracking it, my Net Investable Assets became positive. During the month of April, my NIA went from ($1,100.67) to $3,491.19. This is a significant milestone, and it's fitting that it should come at exactly the one-year mark. I've only been blogging my progress since last June, but I've been keeping detailed Net Worth records since last April 30th.

I was curious about the pace of my Net Worth growth, so I though I would throw together some charts plotting my progress over time. My NetworthIQ profile includes a graph like this for the overall Net Worth, but I wanted to dig a little deeper and look at the components that make up the metric.

As I touched on in an earlier post, there are several things that go into my Net Worth calculation:
  • Assets

    • Liquid savings - All my chequing and savings account balances, as well as any cash I have on hand, get lumped together here. This includes my Emergency Fund and Freedom Account, as well as my day-to-day chequing accounts.

    • Retirement savings - My group RSP and self-directed RSP get added in here. At the moment, this is the bulk of my life savings, since I've been throwing a good chunk of money in here ever since I started working.

    • Non-financial assets - I include a rough estimate of our home value, as well as a slightly more informed estimate of our car's resale value. I don't update these estimates on a regular basis; they're really just placeholders to represent our most significant possessions.

  • Liabilities

    • Revolving debt - This is my credit card and line of credit debt. Basically all of the debt that I would really call "consumer" debt; this is the "what was I thinking??" souvenir from my spendthrift days.

    • Student loans - Ms. Loonie and I each have student loan debt, which we have both consolidated with my bank at a very good interest rate. We're slowly but surely chipping away at these loans.

    • Mortgage - Our mortgage is my main justification for including our home value in the calculation; the estimated value of the condo really just serves to offset the huge liability represented by the mortgage. If we didn't have the condo, we wouldn't have the mortgage, so it makes sense to me to include both.
The Net Worth number is simply calculated as the total of all assets minus the total of all liabilities. I also calculate a couple of variations on this metric:
  • Net Investable Assets excludes the home and car as assets, and the mortgage as a liability, leaving me only with my true "financial" holdings.

  • Net Liquid Assets goes one step further, by excluding retirement savings from the asset side, leaving only the truly liquid portion of my financial position.
After one year of trying hard to make smarter choices, I've managed to increase my Net Worth by $37,364.61, my Net Investable Assets by $28,372.85, and my Net Liquid Assets by $14,162.99. Here's a representation of my Net Worth over this one-year period:

The irregular curve represents the actual month-to-month variations in my Net Worth, while the straight line represents a straight-line approximation of my Net Worth growth. The equation on the chart shows how the straight line is calculated: for every day of the past year, my Net Worth has increased by $96.30 on average.

Although it's not shown on the chart, there's a statistic called R2, which shows how closely the actual observed fluctuations are represented by the straight line. The closer the R2 gets to a value of 1, the more "accurate" the straight-line approximation is. This line has an R2 of 0.98, which means that my Net Worth progress is matched quite well by a consistent upward trend of $96.30 per day.

This is all well and good, but where is this $96.30 increase actually coming from? I decided to plot the components of Net Worth individually, to show how each piece has contributed to the overall growth. Note that, because my estimated home and car value have not changed in the past year, I will not include them in this trend analysis.

My biggest asset is my retirement savings, so let's start there. By plotting my savings over time, I see that my investment balances have fluctuated quite a bit over the past year, with market movements. The market dips in July and the November-December time frame are clearly visible. However, despite these variations, the fitted line of $33.67 per day still has a respectable R2 of 0.9, so the consistent upward trend is once again a reasonable approximation of the actual investment growth. This balance growth accounts for 35% of my Net Worth increase.

Cash savings are another story. When I plot my liquid savings over time, I see much more of a boom-and-bust cycle. This is partly due to the fact that I include my Freedom Account, which is really meant more for planned spending than actual saving, in this number. You can see that, during our trip to the US last June, and my brother's bachelor party in October, I really depleted cash savings. The upward spike in November is also interesting: this was me gearing up for holiday shopping. The R2 for this chart is only 0.56, so this is the weakest straight-line approximation. Still, the daily growth of $3.45 indicated here does represent real forward progress, and the trend is consistently positive.

There is less to say about the progress against my debts. Revolving debt has been diminished at a pace of $17.34 per day. The R2 for this chart is 0.98, which indicates a very good linear approximation. In fact, comparing the charts for Net Worth and revolving debt, the two appear to move almost completely in concert. This suggests that revolving debt is the factor most closely tied to Net Worth progress: when one goes up or down, so does the other. Student loans and mortgage have diminished at paces of $16.95 and $24.90 per day, respectively, and since these loans have fixed payments, they each follow a virtually perfect straight line.

The upshot of this is that, by maintaining a focus on paying down my revolving debt and contributing to my retirement savings, and by gradually growing my cash savings, I should be able to continue this Net Worth momentum. These three factors contribute 56.5% of the Net Worth growth, so it is very important that I keep moving on these fronts.

It's nice to know how far I've come, and it's even nicer to have a clear idea of how I got here.

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