2million - My Journey to Financial Freedom

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Monday, October 31, 2005

My $2 Million Net Worth Goal Part 2: Forecasting My Net Worth

In Part 1 of this series I covered my starting points and assumptions in developing my net worth goal. In this post I am going to discuss how I used these to forecast what my net worth could reasonably be in 20 years.

I started by creating an excel spreadsheet that took my annual income, subtracted my estimated cost of living and taxes to determine the amount of savings for each year. I then used my assumption of a 10% annual ROR to determine what the value of my previous year's net worth would be in the current year. I then totaled my savings and the value of my previous savings to determine my target for net worth each year.

Yr

Income

Cost of Living

Taxes

Yr Savings

VoPNW*

Net Worth

1

$55,000

$23,000

$11,000.00

$21,000

$0.0

$21,000

2

$58,300.00

$24,380.00

$11,660.00

$22,260

$23,100.0

$45,360

3

$61,798.00

$25,842.80

$12,359.60

$23,596

$49,896.0

$73,492

4

$65,505.88

$27,393.37

$13,101.18

$25,011

$80,840.8

$105,852

5

$69,436.23

$29,036.97

$13,887.25

$26,512

$116,437.3

$142,949

6

$73,602.41

$30,779.19

$14,720.48

$28,103

$157,244.3

$185,347

7

$78,018.55

$32,625.94

$15,603.71

$29,789

$203,881.7

$233,671

8

$82,699.66

$34,583.50

$16,539.93

$31,576

$257,037.7

$288,614

9

$87,661.64

$36,658.51

$17,532.33

$33,471

$317,475.3

$350,946

10

$92,921.34

$38,858.02

$18,584.27

$35,479

$386,040.7

$421,520

11

$98,496.62

$41,189.50

$19,699.32

$37,608

$463,671.7

$501,280

12

$104,406.42

$43,660.87

$20,881.28

$39,864

$551,407.5

$591,272

13

$110,670.81

$46,280.52

$22,134.16

$42,256

$650,398.9

$692,655

14

$117,311.05

$49,057.35

$23,462.21

$44,791

$761,920.6

$806,712

15

$124,349.72

$52,000.79

$24,869.94

$47,479

$887,383.3

$934,862

16

$131,810.70

$55,120.84

$26,362.14

$50,328

$1,028,348.5

$1,078,676

17

$139,719.34

$58,428.09

$27,943.87

$53,347

$1,186,543.8

$1,239,891

18

$148,102.50

$61,933.77

$29,620.50

$56,548

$1,363,880.3

$1,420,429

19

$156,988.65

$65,649.80

$31,397.73

$59,941

$1,562,471.4

$1,622,413

20

$166,407.97

$69,588.79

$33,281.59

$63,538

$1,784,653.8

$1,848,191

 

 

 

 

Net Worth in 2021:

$1,848,191

*VoPNW - Current value of my previous year's net worth (including 10% Avg Rate of Return)

As a result of forecasting my yearly net worth ($1,848,191.00 in 2021), I decided an aggressive but reasonable goal would be a net worth of $2 million. It would me a nice round number that would be easy to remember and was slightly ahead of my already optimistic forecast of what my net worth could be.

My next post in this series will highlight my yearly progress since then and cover some of my additional observations since I came up with my $2 million net worth goal.

8 Comments:

  • Your assumptions of increases in pay of 6% per year is fundamentally flawed in your line of business.
    -insider

    By Blogger fuzzy, at 7:43 PM  

  • Did you use a formula to determine your Cost of Living and Taxes? If so, what was it?

    By Anonymous Anonymous, at 7:14 PM  

  • fuzzy - you may be right. I spent some time discussing this with my manager and I think you are right long term, although so far my avg increase in pay has been above my assumption.

    I did use a formula to determine my cost of living and taxes see part 1 assumptions for details.

    Let me also add that I don't even think my estimates/formulas are going to be very accurate because alot of things are going to change in my life. 1) Marriage (dual income would boost income, but taxes and cost of living would go up), 2) kids (reduces taxes, but increases cost of living, may hurt income if a parent stays home). But I'll save those issues for a later time.

    However I think these estimates are a rule of thumb and a good gauge to help with decision making related to finances.

    Has anyone done something similar?

    By Blogger 2million, at 9:18 AM  

  • In your table for arriving at the goal, you're using a "Value of Previous year's networth" for comparison - if that's to take into account inflation, I'd recommend a different approach. Using historical inflation as a guide - $2 million 20 years from now would be a little more than $1 million today. If you had a million today, would you feel that adequate for the rest of your life?

    You do have additional time - assuming that you work for 40 years, that's an additional 20 years - and the second million or more is always faster than the first.

    Best wishes

    By Anonymous 2¢ Worth, at 9:50 PM  

  • 2mil,

    I think your assumptions and goals are all fundamentally correct. I myself have done something nearly identical to you and have come up with a goal of approximately $1.5 million in 20 years. My line of work and the income difference accounts for the slight variation in end figure.

    I seemed to have started out at a much lower income than you but my income will grow, and has grown, on average at between 6% to 8%. So, I think depending on your line of work 6% is reasonible for the medium term.

    One thing to note is when kids come along and if the wife decides to stay home, that will help on child care costs, gas, etc. In many cases depending on how much she made this may be MORE beneficial.

    My wife and I decided she should quit her job becuase we were acctually spending more money with her working than she was bringing in between gas, car expenses, and childcare costs and other miscellaneous costs. Plus, she enjoys staying home!

    ~Nick

    By Anonymous Anonymous, at 10:17 AM  

  • As your pay increases, you will go to higher tax bracket, which means, for every dollar earned, you would have to pay higher tax. This has not been incorporated into your projection?

    By Anonymous Anonymous, at 7:57 PM  

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    By Anonymous Zara, at 7:03 PM  

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