What’s your Personal Finance (PF) score and how do you calculate it?
The new score that I’m proposing is called the PF Score, or Personal Finance Score.
This is measured by taking the ratio of your net worth and dividing it by your annual expenses.
So if you have a net worth of $100,000 and your annual expenses are $25,000, your score is 4.
Alternatively you can have a negative score if you have a negative net worth, someone who owes more to others than the cumulative total of all their personal assets.
HOW TO CALCULATE YOUR PF SCORE
Your net worth divided by your annual expenses
Simple enough, no?
WHAT IS YOUR NET WORTH
Your net worth is how much you own minus how much you owe.
If you have $10,000 in the bank and owe $15,000 your net worth is -$5,000
$10,000 – $15,000 = – $5000
You can see my net worth over the years as an example; I track it monthly and yearly.
It sort of looks like this:
WHAT ARE YOUR ANNUAL EXPENSES?
Depends! You tell me.
MY 2012 PF SCORE
2012 NET WORTH = $200,145
2012 ANNUAL EXPENSES = $52,043
$200,145 / $52,043 = 3.84
Ouch! Although this was the year I moved to the U.S. and back.
MY 2013 PF SCORE = 5.606
2013 NET WORTH = $217,275
2013 ANNUAL EXPENSES = $38,756
$217,275 / $38,756 = 5.606
Hey, at least the score is rising!
MY PROPOSED 2014 PF SCORE
2014 PROPOSED NET WORTH = $217,000
2014 PROPOSED ANNUAL EXPENSES = $20,000*
$217,000 / $20,000 = 10.85
I am really trying this year even taking into account Baby Bun. If I can go from $52,000 down to $39,000, I can go from $39,000 to $20,000. This is my logic.
Naturally, if I can also increase my net worth while sticking to $20,000 in expenses .. I will be over the moon.
WHAT DOES IT ALL MEAN?
So now that you have your number, what does it all mean?
- 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!
You can read in more about this method detail via jly224.