Improving Our Ratios
A couple of months ago I wrote a post that identified some financial ratios I’m starting to measure. These are great indicators of how well the plan is progressing so I like to see them go up. I’m already getting a chance to make that happen.
Between finalizing things for this year and planning to pay myself a bit more from my business every month (and investing that entire extra amount), I expect our monthly ratios to improve in January. As compared to the start of October, they will soon be:
- Investment savings (actual investment amounts and mortgage principal payments, all of which reduce our future income needs): 48.6% of net income (was 44.6%)
- Total savings (investment savings plus things such as saving for the next vehicle we will need and the anticipated monthly increase in our general cash account): 60.9% of net income (was 57.8%)
- Core living expenses (what we would need each month to live a normal life without mortgage payments or extras such as vacations): 27.7% of net income (was 29.8%)
- Investment savings / core living expenses (what we invest compared to what we spend on ordinary living expenses): 175.5% (was 149.6%)
- Housing costs / gross income (similar to the GDS used to qualify for a mortgage): 16.4% (was 17.4%)
At the end of the year I also estimate that we will hit the following ratios, again compared to the start of October:
- Investment portfolio total value / mortgage balance (how close we are to having investments worth more than our loans): 30.3% (was 24.3%)
- Estimated investment income / core spending (how close we are to paying the bills without working, not counting the mortgage): 13.2% (was 11.0%)
- Net worth gain over the last year: 53.9% (was 55.2%)
Only one of those values, the net worth gain, hasn’t improved. And that’s not bad because it’s still at a great level and the comparison point for the gain (our net worth one year ago) keeps increasing which makes the percentages smaller. The dollar value that produces that 53% gain is actually a lot more than the one that made a 55% gain.
This can also be compared to different approaches. By the time we have lived here for 2 years we will have built up an investment portfolio worth more than 1/3 of the value of the mortgage. That shows that if we just focused on paying off the mortgage first, it would be gone in under 6 years (maybe closer to 5 counting the interest saved). Of course I’m much more comfortable with putting that all into a portfolio while we enjoy low interest rates. The portfolio should hopefully end up covering a lot more than the amount of the mortgage within a few years. It interest rates stay low enough we can keep the mortgage for the rest of the 16 years we currently have left. If not we can annihilate it at any time.
The first ratio is the one I would like to work on a bit more. If we can get our investment savings up to 50% of our net income that will put us in the range of some very respectable bloggers. Unfortunately even investing more didn’t put us there since it took a higher income to do that. I think we’re pushing things far enough already that it would be hard to increase the investments further without having more income but we’ll see what we can do. However that’s just counting the regular monthly amounts. With a few one-time additions we’ll be just over 50% in total for 2012 and may do better next year.
This will take a bit of caution though. If I start getting a lot of extra income from passive income projects, half of the after-tax income will need to be invested to keep up the ratios. Preferably all of it will be invested after reaching my special income goal. If not, this will crash the ratios and make us look bad.