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Friday, December 19, 2014

The PF Score

Posted by Tim Stobbs on February 24, 2014

So I was reading my usual blogs the other day when I came across an idea on how to an idea how you are doing financially overall along the idea of the credit score.  A single number which would give you an approximation on how you are doing.

The idea was to use your net worth divided by your annual spending to produce a one number summary of your financial state.  They called it the PF Score. To give credit where credit is due.  The original idea came from jlyblog.

Then depending on your score that should give you some idea of where you are at.

  • Anything in the negatives: You need to get out of debt now.
  • Score of 1: You have enough for one year’s worth of expenses.
  • Score of 5: You are picking up steam.
  • Score of 10: Getting better.
  • Score of 25: You are financially independent!!
  • Score of 30: Your investments are making more than you spend.
  • Anything above 30: Sit back and relax, you’re golden!

In the event you are dying to know, my PF Score would be around 18.

So on one hand I love the simplification of giving you and idea of where you are at in life financially.  Yet I do have one major beef with the idea.  The original author states when your PF score is at 25 you hit financial independence, but that isn’t correct.  Why?  Because it assumes that you can turn your dead weight assets like your home equity or car equity into an income stream.  Which is possible in some cases like a rental suite in your home, but unlikely for the majority of people.

Paying off your mortgage for example, is a good thing and it should increase your PF Score, but the real boost to your score happens when you finish your mortgage and your spending drops.

So should we do?  Well I still like the idea of the PF Score and the basic setup, I would just caution changing the scale a bit.  I would shift 25 to “You are doing great now.”  Then at a score of 30 state “You are likely close to financially independent.  Congratulations and you might want to start looking at a life with no work if you want.”

The exact spot of hitting FI will depend entirely on what multiple of house cost to your annual spending, but based on a few Google searches in Canada at least the average house cost is $389,119 (in Jan 2014) and the most recent average spending by household was $56,279 (in 2012).  So divide those two out and you get 6.9, so let’s round to 7.  So add 7 to the original scale of 25 and there we go a PF Score of 32 should mean you are financially independent in Canada at least.  Obviously this depends on your particular numbers, but if we are dealing in general statements they works just fine.

So do you like the idea of a PF Score?  Or is it too general to be useful?

Comments

11 Responses to “The PF Score”
  1. Jay says:

    I would use my liquid net assets instead. If it can’t be turned into cash next week, it’s not liquid.

    I would exclude house, car, jewelry, family heirlooms etc. Anything that you don’t want to sell next week. If you’re in doubt about something try putting it on Kijiji, if you can’t you have your answer.

  2. jon_snow says:

    Tim we must read the same blogs because I saw this too.

    If I include everything we own on this earth, and divide it by our comparably small yearly spending amount… It comes out to 66.6.

    If I use just liquid assets, as Jacq suggests, my number is 40.

    Why am I still working again?

  3. DougieG says:

    How would you include a defined benefit, indexed to inflation pension into this, since this covers all our fixed expenses, and our investments cover our personal and travel expenses?

  4. Jay says:

    @jon_snow It must be because you love your job! :)

    @DougieG – in the spirit of the PF score, keep it simple. Pretend the DB cancels the expenses. Then calculate your score on the personal and travel expenses. This is all for fun, I doubt anyone will retire just because they have a high score (although I would). My score is 4 :(

  5. DougieG says:

    @Jay – if the DB cancels the fixed expenses, the we are at 26 on the scale. Good job I did retire early!

  6. deegee says:

    I am at 56 using only my investments. Including my co-op apartment, it rises to about 60. I am retired.

  7. Tim Stobbs says:

    @Jay – While I understand your point of view, I disagree with just liquid assets. If the intent is to have a single number for a large part of the population you have to include non liquid debt and assets like a house (after all 70% of Canadians own one). Hence my suggestion to just change the scale.

    @Jon_snow – I have no idea why you are working unless you plan to seriously increase your spending in retirement. Hand in your notice already. ;)

    @Dougie G – I agree with Jay’s idea to just cancel your spending with the DB benefit. Or an alternative way would be to assume a amount of assets equal to generate your benefit at a 4% rate of return. So a $24k benefit would be worth $600K in assets.

    @deegee – HOLY CRAP!!!! You are set and then some. You might want to start your own charity organization in your will. ;)

  8. Jon_snow says:

    @Tim – 2014 is my last year of work, I promise you. I will be 42. Have the full support of my wife – she wasn’t totally sold until I showed her how our dividend income has almost matched my current job income.

    Barring a 2008-style market collapse, I am more than good to go. Will work the rest of the year to pad the portfolio a bit more…

  9. Jay says:

    @jon – Congratulations on almost retirement! For fun take a look at your stocks and their dividend history through the 2008 crash, it’s probably not too scary.

    @tim – if I include my house my number jumps to 13 from 4. It’s pretty dramatic, I go from 16% ready (25 point scale) to 40% ready (on a 32 point scale). I still like the idea, I’m not sure about its utility for me.

  10. James Brown says:

    If you’re hesitant to include your house in this calculation, then think of it as a (mostly) fixed cost asset that pays a dividend equivalent to rent in your area.

  11. I just read about the PF score earlier this week as well. I really think it has a lot of merit. I haven’t calculated ours yet…though I know it will be FAR lower than most of the ones shared here (so jealous/motivated). When I calculate my net worth I don’t include non-productive assets like our cars, art, etc. I do include the value of our home because it produces an “income” ie my living space costs. Right now, since I’m making mortgage payments (a cost I include in my expenses) including the home value in my net worth makes sense. When the mortgage is done – I think excluding it from the net worth for the purposes of the PF calculation would give a more accurate statement of our financial independence.

    Congrats to everyone over the 25 mark! I’m sure lots of hard work and tough decisions went into that achievement. Great to see so many succeeding!

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