Updated: Mar 3
As mentioned in my introductory post, initially I had no idea of the value of my overall assets and how much was our actual net worth. Hence, when I started planning my personal finances, one of the first few things which I did was list down all our assets – investments (equity, Mutual funds, etc.), savings, deposits, provident funds, EPS, etc. for both my wife and myself. Now I had a clear picture of what we actually owned.
My assets are relatively simple, however you might also have Real estate, Gold, bonds, etc. etc. Some of you might have also taken the so called ULIPs or other Insurance policies promising assured returns, etc
Once you have visibility into your entire asset base, the next step is to calculate the post-tax returns you expect from each of your assets in the long term. In some cases it would already be known and fully assured (savings account balance, fixed deposits, Bonds, Govt. Schemes, etc). In other cases, you would have to put a number based on the type of investment, historical data, and your own estimations. For e.g., in case of Small Cap investments it could be slightly higher over a long period of time (7-10 years) as compared to Large Caps. However, the idea is to estimate the returns of each and every line item so as to get a final blended growth rate.
In case of Real estate, you would really need to look at the economic scenario to get a reasonable estimate. Below is a sample snapshot of this exercise.
Please note that all returns mentioned above are for illustration purpose only. They could vary depending on your tax slabs, bank, type of investment, etc.
If left untouched, the blended growth rate is the rate at which your assets are expected to grow on a year-on-year basis.
When I did this exercise for my assets, it was a big eye-opener. My overall post-tax asset growth rate was less than 5%!!. Due to my unplanned and inefficient investments with majority of my money parked in low yield FDs & savings accounts coupled with poor investments in mostly junk stocks, I was hardly growing my asset base. Factor in the inflation, the value of my assets was at best static, if not going down. There was no way I could have ever achieved financial independence with this kind of growth rate.
This is when I took the next step of building a proper asset base. In the next few months, I slowly started re-balancing my entire portfolio to achieve a high enough growth rate which could lead me towards financial freedom.
My next post on Portfolio rebalancing and optimization (Part 3) covers few of my strategies on how I went about changing my entire portfolio. The re-allocation exercise took me around 6 months and currently I am hovering on about 9% expected return (in the long run) from a measly 5%.
I hope to reach 10.5%+ CAGR in the next 12-18 months.
I have not talked about Liabilities in this post. One needs to make a list of all outstanding liabilities (Loans, overdues, etc) to get a complete picture of their net-worth.
Please do let me know your thoughts. You can view all my other posts here.
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