My $2 Million Net Worth Goal Part 1: Assumptions

The purpose of this web log is to document my journey to financial freedom. I have defined financial freedom as a net worth of at least $2 million. It may be a moving target, but I guess we will see over time. Regardless, I wanted to share how I came up with this goal.

When I started working after grad school in 2001, I decided I need to set a goal for retirement. I am a very goal oriented person and like to have a "stick in the ground" to focus on. I decided to figure out some starting points, identify some assumptions, and use these to help me determine what was a reasonable net worth goal.


Starting Points
In 2001 I turned 25, my starting salary straight out of grad school was $65,000, and I was basically starting out with nothing.

Assumptions
I then needed to come up with some assumptions about the next 20 years:
-I assumed I would pay 20% of my income in taxes. This is probably way low but I figured I would work hard at legally reducing my taxes (when financially beneficial) through real estate investments, running businesses (at the time I was overseeing a small family business), buying a home, etc
-To make my estimates conservative I started with a annual income of $55,000 ($10k less then my income at the time) and estimated that my annual income would increase 6%/yr thereafter
-I assumed everything I didn't allocate to taxes and cost of living would go to savings
-A big assumption I made was that I would be able to make a 10% annual ROR on my savings
-I conservatively assumed I had no savings in 2001 (net worth was $0), but in reality I was probably worth $5-10k.
-I assumed my cost of living (everything other than taxes and savings) in 2001 would be $23,000 based on my chart of estimated expenses listed below and increase 6%/yr thereafter

Estimated Living Expenses

Living Expenses

Monthly

Yearly

Credit Card

$600.00

$7,200.00

Car

$300.00

$3,600.00

Car Insurance

$50.00

$600.00

Mortgage

$850.00

$10,200.00

Health Care

$40.00

$480.00

Utilities

$100.00

$1,200.00

 

 

 

 

Total:

$23,280.00



Now that we covered my starting points and assumptions, my next post will detail how these helped me develop my net worth goal.

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About 2millionblog.com

A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
Current Net Worth: $1,278,865

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