My 2018 year in review
Across the web, I see other financial bloggers sharing their year-end financial summaries. Some folks had good years. Financial Samurai's net worth increased by 6.5% in 2018. Others had mediocre years. Fritz at The Retirement Manifesto saw his net worth decline by 2.1% thanks to a volatile stock market.
Me? Well, I'm embarrassed to share how my year went financially. It sucked. No, seriously. It was terrible.
My net worth declined by 15.2% in 2018 — nearly $250,000!
Here's a graph of the monthly changes to my net worth during the past two years:
What happened? Did I buy a Lamborghini? Did I spend a ton during my recent three-week trip to Europe? Have Kim and I been binging on cocaine and chocolate? Nope. While there's no doubt that my habits contributed to my loss of wealth, there are larger forces at play here.
Let's take a closer look.
Note: As a reminder, your net worth is a snapshot of your financial health. It's what you own minus what you owe. While not a perfect measure, net worth is a useful tool for tracking your financial progress. Want more info? Here's how to calculate your net worth (and what to do with it).
Three Big Bruises
It's easy for me to rationalize my huge decline in net worth, to explain that it's mostly just smoke and mirrors. But I can't help thinking I'm fooling myself. Let me explain.
My loss of wealth seems to be due to three main factors:
- Ongoing home improvements. Kim and I moved from our penthouse condo to this country cottage eighteen months ago. One of our goals was to reduce the “carrying costs” of owning a home. We achieved that. Living here costs us about $725 less each month than living in the condo. But we've also dealt with over $100,000 in necessary home repairs. Holy cats! (And right now, the kitchen sink is leaking. Ugh.)
- The re-acquisition of Get Rich Slowly. I can't reveal how much I paid to purchase this site from its previous owners, but it's a significant chunk of change. Plus, I've put additional money into GRS for growth and development.
- Investment losses. In 2018, the S&P 500 fell by 6.2%. That hurt my net worth. But I also lost money investing in other small businesses. (I'll write about this in the future. It's one of those “it seemed like a good idea at the time” things that's actually been a poor choice for me.)
It's obvious how the investment losses effect my net worth, but let's explore the first two points.
In theory, the improvements we've made to our home should increase its value.
We've spent a grand total of (drumroll, please) $143,290.09 on remodeling projects since we moved in, which is nearly one-third of the $449,665.36 purchase price. However, that doesn't mean the home is now worth $587,959.64. (I wish!) I'd be happy if we recouped 50% of our costs, which means our place is probably worth about $516,314.60.
That said, for accounting purposes, I treat remodeling expenses as if that money is simply gone, as if I'd spent it on something disposable. Meanwhile, Zillow says our home is worth $428.068.00. In other words, the combination of home improvements and declining property values has dinged my net worth by $160,000!
A similar thing happened with Get Rich Slowly. Technically, purchasing the site shouldn't have affected my net worth (assuming it's worth what I paid). I'm merely converting one asset (cash) into another (the website). However, I've never included the value of my businesses in my net worth, and I don't intend to start. That means (from an accounting perspective), the money I've put into this site has vanished.
So, you see, it's easy for me to rationalize and justify, to explain away my loss of wealth. Easy, yes, but stupid. I am part of the problem.
Lifestyle Inflation and Frictionless Spending
There are some good reasons that my net worth dropped in 2018. But there are some bad reasons too. Some of the drop comes from increased consumerism on my part. To wit:
- Although we're dining out less than we used to, we're still spending too much on restaurants. In 2018, I spent an average of $389.63 per month dining out. I'd love to get this number down to about $200 per month.
- Meanwhile, my grocery spending hasn't decreased at all since moving. In fact, it's increased by $20 per month. This is ridiculous. We have plenty of low-cost grocery options around us. I need to make use of them.
- I spent a lot on health and fitness in 2018. For much of the year, I was seeing a personal trainer twice per week. I caught pneumonia. I bought a kayak and an expensive bicycle. I had more testing for my sleep apnea. In many ways, I've been paying for external motivation to stay healthy. It's too expensive. I need to shift to internal motivation, which will allow me to get fit for less.
- I've been sucked into what my pal Douglas Tsoi calls “frictionless spending”. My Amazon Prime account makes it easy to order whatever I want, whenever I want. My iTunes account makes it easy to find a movie and buy it — with no effort, no “pain of paying”. Companies are finding ways to lower the barrier between impulse and buying. I need to build barriers to spending.
After my divorce in 2012, I was proud that I created a lifestyle that cost me about $3000 per month. This seemed like a completely reasonable amount for the level of luxury it gave me.
When I bought the condo in 2013, my expenses increased to about $4000 per month. While this bothered me a little, I felt like it was a worthwhile price to pay for what I received in return.
After Kim and I returned from our RV trip across the U.S., I found that our lifestyle was costing me closer to $5000 per month. Holy cats! I decided to take action, which is why we moved from the condo to our country cottage.
The trouble is that my monthly expenses haven't dropped since moving. Yes, the monthly carrying costs on this house are about $725 less than the condo, but I haven't banked that savings. Instead, I've used it to fund lifestyle inflation. I'm still spending about $5000 per month.
This needs to stop.
In Pursuit of Personal Profit
I've spent much of the past ten days poring over my finances. I created a spreadsheet of monthly spending, then systematically worked my way through, looking for expenses to cut. With two hours of work, I found $464.27 of recurring costs that I could trim from my budget immediately. That number will increase to $741.97 after a couple of contracts end.
On top of that, I want to change my current spending patterns. How much can I save by curbing my epicurean habits? A ton, I hope. Plus, I plan to build barriers between me and frictionless spending.
Ultimately, I have two financial goals for 2019.
- First, I want Get Rich Slowly to become profitable by the end of the year. Ideally, it'd generate enough income to cover most of my living expenses. (To be fair, the site recently moved from the red to the black, but I don't have enough data yet to call it profitable long-term.)
- Second, I want to decrease my spending from about $5000 per month to about $4000 per month. (Truthfully, I'd love to cut my expenses to $3500 per month — or lower.)
The bottom line? I want to earn more than I spend in 2019. In my dream world, by the end of the year I'll have a positive saving rate for the first time since I sold this site in 2009. My goal is for my wealth to grow, not shrink.
I know that I'm in a fortunate position. I have a substantial nest egg and can afford to live well. There are many others for whom living on $4000 per month would seem like luxury, not like cutting back. I get it.
That said, it's scary to crunch the numbers and see that my net worth declined by $250,000 in one year — especially when all of that money vanished from my regular investment account, the one that contains the pool of cash I need to live on for the next decade until I can access my retirement accounts.
In a way, this situation has brought me full circle. When I started Get Rich Slowly back in 2006, my primary focus was frugality. As I earned and saved more, my attention turned to building wealth. After I sold the site, I was more concerned with maximizing happiness through managed spending. Now, though, I feel like I'm returning to my roots and it's exciting!