Each month, I share a net worth update for the Brewing FIRE household. This brief summary of our financial standing serves as a progress report on our journey to financial independence.
In addition to giving a snapshot of our net worth, I will compare our progress to the previous month. I will also comment on any notable changes to our finances. Finally, I will share my “Chart of the Month,” which should add some color to my saving and investing strategy.
October 2018 Net Worth
We use Personal Capital to track our net worth. Personal Capital makes it easy to track all of our banking accounts, investing accounts, credit cards and loans all in one place. Personal Capital also has numerous other functions for analyzing your investment holdings, asset allocation and performance, as well as some great retirement planning tools.
October was a good month on the non-financial front. It’s prime leaf-peeping season in the Northeast, so we made sure to go hiking and enjoy the fall weather as much as we can before winter arrives.
We also celebrated Baby BF’s first birthday, or as I call it- “one year of keeping the baby alive.” All in all, it was a great success! Kidding aside, she is a great little human, and we’re very fortunate to have such a classy, chill baby.
We made another large purchase in October- a catalytic wood burning stove! The last few winters, we’ve been using a stove that came with the house. It definitely helped to supplement our heat, but it was also quite inefficient. When I hauled it out I found that it was manufactured in 1974, so we can assume the efficiency was in the 50% range at best. This year we upgraded to a Blaze King that should be around 80% efficient. My goal is to use the stove to cut our oil bill in half this winter. I will update on our progress as we go.
Enough about leaves, babies and stoves. It’s time to talk about the Net Worth Massacre of ’18. Just kidding. People treat a market dip like it’s the beginning of End Times. Relax, it’s only a correction.
See that? Efficient market theory would suggest that we are correcting for a reason, and the reason in this case is that equity prices may have gotten ahead of themselves. That’s all. Everyone breathe, and move on.
In all honesty, there’s only one part of the net worth breakdown that bothers me, and that’s the cash position. See, I can’t control the value of my stocks and funds, or the value of my house, but I can control my saving and spending habits.
Cash: We drew down our cash cushion slightly this month, but still have plenty of a buffer. As you could guess, this is due to the purchase of the wood stove. There’s no real concern here.
Looking at the bigger picture, we are probably going to start building up a larger cash position. We have a few potential expenses coming up regarding my rental property, and we need to start saving up for our front-loaded 2019 Roth contributions.
Also, I want to have a little bit of cash on hand in case stocks go on sale in a more meaningful way.
Equities: our investment balances are down across the board, due to the aforementioned market dip. I already covered my basic plan in my latest Short Pours post. I’ve been selling risky and cyclical positions, leaving dividends in cash, and keeping a portion of new contributions in cash.
I have also started a small position in an aggregate bond fund. I’ve never held bonds before, but this is mostly because yields have been abysmal for years. They’re finally starting to actually yield something.
This is how I see it: I’ll keep a small portion of our money invested in bonds for the relative safety and to collect the ~3% yield. If interest rates continue to rise, I’ll leave the money in bonds and collect the higher yield. If we see another recession, then the bond fund will appreciate, and I can rotate the money back into equities again. It’s a win/win in my book.
Home Equity: Nothing much to report here. We continue to make additional principal payments on our house, with the hopes of paying it off in the next 10 years.
Chart of the Month: Purchasing Power and Interest Rates
Speaking of home equity and the value of housing. This month we’ll look at the relationship between home values, purchasing power, and interest rates.
When you apply for a mortgage, your monthly payment is calculated based on the amount borrowed, term of the loan and the interest rate. The more you borrow, the more you pay, and same goes with the interest rate.
As you are probably aware, we are currently in an increasing interest rate environment. Between 2008-2015 we were at 3.25% for a 30-year fixed rate mortgage. But now rates are rising again. This means the economy is doing well and we are finally ‘normalizing’, but it also means that it costs more money to borrow.
For folks that budget how much they want to pay for a home in terms of monthly payments, the interest rate is critical. As interest rates rise, the purchasing power (based on monthly payment) decreases.
Let’s say your family has budgeted $1000/month for a mortgage payment. We’ll assume no property taxes or insurance for this exercise. If you bought your home any time between 2008 and 2015, you could borrow up to $300,000 and stay under budget. If you went house shopping today, though, your maximum budget is $230,000. That’s a huge difference, and it’s all due to interest rates.
Thanks again for following along with our monthly progress report, and please let me know what you think in the comments. Cheers!