Financial Ratios Revisited
I recently started tracking a few ratios that show how well we’re managing our finances. In the months since the last update we haven’t made any major changes, but we have seen some improvements anyways.
We now have the following monthly ratios:
- Investment savings (actual investment amounts and mortgage principal payments, all of which reduce our future income needs): 49.9% of net income (was 48.6%)
- 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): 63.2% of net income (was 60.9%)
- Core living expenses (what we would need each month to live a normal life without mortgage payments or extras such as vacations): 27.8% of net income (was 27.7%)
- Investment savings / core living expenses (what we invest compared to what we spend on ordinary living expenses): 179.8% (was 175.5%)
- Housing costs / gross income (similar to the GDS used to qualify for a mortgage): 16.6% (was 16.4%)
Part of the reason for the change is that we removed a small source of part-time income. A lower income makes most of these ratios look a bit better since we are still saving and investing the same amount. However we’re starting to get some real momentum too. As our regular mortgage payments increasingly go towards the principal, the investment savings ratio has nearly reached 50% without having to change our monthly cashflow.
In our investment portfolio we’re also seeing momentum. When I look at it I can’t remember why it’s so high since the market gains are carrying it further than our own contributions. Even thought it’s only a fraction of the way to our goal we’re starting to see the rewards.
One of the places that shows up is in the other ratios:
- Investment portfolio total value / mortgage balance (how close we are to having investments worth more than our loans): 45.8% (was 30.3%)
- Estimated investment income / core spending (how close we are to paying the bills without working, not counting the mortgage): 19.3% (was 13.2%)
- Net worth gain over the last year: 55.0% (was 53.9%)
These are looking a lot better compared to the start of this year. It shows the growth of our portfolio, and once again I can’t explain why it’s grown so fast even though we are investing a lot every month. At the end of the year I estimate that our portfolio will be around 2/3 of the value of our mortgage assuming markets don’t rise anymore. That would give us a nice level of safety, and by the end of next year our investment balance could be greater than our mortgage balance (less than 4 years after buying our house). It could also be enough to pay about 35% of our core monthly expenses.
For some reason, Quicken is saying we have less than 15 years left to pay off our mortgage which is shorter than I expected. Either way that isn’t a priority for us now since I believe that investing as much as possible will give us more freedom.
We’ve recently started watching our spending more closely and made a one-time extra investment this month, so the total amount we put in this month was nearly 4 times the usual. We may be able to increase our monthly investments later this year without taking more income. My business income also looks like it may turn up by the end of the year, allowing further improvements. But even without any of that the gradual improvements in our mortgage payments will inch us over the mythical 50% savings rate. Will we be able to make it to 55% this year?
For years it’s seemed like we worked hard with little results to show for it. Now we’re starting to see them.