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?