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Tuesday, July 22, 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?

Work Options

Posted by Dave on February 19, 2013

This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.

As time goes on and my wife and I move through our financial plan, we sometimes discuss our options for the future and review what we’re doing now and what we could possibly do in the coming years.  One of the topics that constantly come up is the question – when will we be able to retire?  Once in awhile, I put financial variables and different situations into Firecalc to examine the odds of going broke before my expected lifetime is over.  At a point when there is a 0% chance of ending up destitute, we’ll probably add more of a buffer to the portfolio to provide for any unforeseen health emergencies or otherwise that would impact cash flows utilized in the simple calculation.

One thing that we talk about sometimes is working after we’re done with our “careers”.  There are two situations that we have talked about working:

1.) To retire earlier than our projected 2025 date.  At a certain point, our portfolio will be large enough that we can just allow it to compound year-over-year and work to subsist, rather than adding to the nest-egg.  If, for example, we need $25,000 to survive between the two of us, we could work part-time until we’re 50 or so and let our portfolio get to where we need it to.

2.) To ensure we won’t run out of money.  By nature, I am a fairly cautious person.  I keep a savings account that is probably larger than necessary, and limit expenses to levels that are probably lower than needed.  Working to an income level that just covers our (relatively low) expenses and not tapping into our retirement account would provide additional security in retirement.

Ideally, we would either be able to work a consistent part-time job, or find a job that we could do seasonally.  At some point this year, I will hopefully get an accounting designation.  One possibility for me would be to prepare tax returns or assist in creating financial statements during tax time.  This kind of career works well for Canada, as the majority of the work could be done when the weather is terrible and allow for free time in the summer.

Alternatively, I could compete for entry-level jobs which are more transitory than a stereotypical career and I could work to a point that I’ve earned enough for the year and then quit.  This situation would allow for me to (maybe) find a different career or company that I have interest in, but would probably result in some sort of repetitive work (based on what I am aware of for the majority of entry-level jobs in my company).

I’m not sure what my wife and I will eventually decide – we may both stay with our respective companies for the long-term.  Alternatively, a significant switch in careers could lead to less pay, meaning an earlier exit from full-time work may not even be an option.  A lot can happen in the next decade or so – I have only been working full-time for 10 years at this point, and I’ve already held three different jobs, while my wife has worked for around 5 or 6 different companies.

Would you work part-time for an additional 5 years or so to have more free time now?  Or will your exit be a “clean break” from working?

Mint Canada Review or How to Enable a Tracking Habit

Posted by Tim Stobbs on July 20, 2012

Ok, first off I will admit:  I’m a financial tracking addict.  I currently publish my net worth on this blog every two months and I also have been doing an experiment on tracking all of my spending since last November.  This recently lead me to try out Mint Canada after hearing about it for a while, after all I’m all about using any tool that makes my life easier.

First off let’s set the record straight on a few things: yes Mint pulls data from all your various bank accounts and pools it together into one place for tracking purposes.  Yet it doesn’t allow you to do anything with those accounts.  You can’t do a bank transfer in Mint, its read only on a secure system.

Now with that out of the way, why on earth would you do this?  It saves a hell of a lot of time.  Currently to do my net worth updates requires doing five separate logins to different online sites get the data I need.  Mint pulls the majority of that data together for me automatically.  Out of all my logins it can’t handle one account, which is my pension plan (which isn’t even on a bank website, so I can forgive them).

On top of that Mint is intelligent enough to guess what categories your spending belong to based on where the transaction occurred, so a payment to my mortgage is automatically assigned the category of ‘Mortgage/Rent’.  This also applies to your credit card transactions if you link those in, so a charge to ‘Chapters/Indigo’ shows up as ‘Shopping, Books’.  While this system isn’t perfect it does get the majority of the items correctly assigned.  You can also change the category for those expenses that Mint can’t figure out.

Getting started is damn easy, add your accounts access and then your assets (like house value) and see what Mint spits out.  I loaded everything up in less than an hour (which included some issues on my end).  You might have to correct a few things, but generally it will load the last two months fairly correct when you start.  Then you can track your spending by categories as well as income and net worth.  Using the ‘Trends’ section lets you graph your little heart out and even export data if you want.

There is also a section on budgets to help guide your spending by category if you would like to load that information and tracking as well.  I haven’t use this much yet.

Yet despite all this usefulness Mint Canada does have a few issues that you might want to know about.  First off you can’t add manual or fake transactions to complete your net worth if you are missing an particular bank.   So that prevents you from loading previous data that you might personally already have.  There is a bit of a work around you can manage by adding an extra asset with the value of that account to get your full net worth.

The other quirk I came across was the fact when dividends show up in my investment accounts that doesn’t show up as income.  I had to create a new income category to allow tracking of that.  Odd, but easily fixed.  Also joint accounts will tend to show up twice, which means you will need to exclude a particular account from showing up twice in Mint.

Overall I’m thrilled with the time saving nature of Mint Canada, it makes tracking expense and income very easy and saves a lot of work with spreadsheets that people tend to do manually.  It does have a few odd things that you might need to work around, but overall it works for my needs and I’m happy I finally signed up.  I only wish I would have started using it back in November of last year so I would have more data.

So do you use Mint Canada, what did you think?  Or if you don’t, would you try it?