April 1st each year.

[Keys]

Back when I was struggling I used to take a monthly check on how I was going with debt repayment and assett accumulation. This helped me get through some tough times. Now, I propose something similar.

On April 1st each year, I will take stock of assetts and debt and express them here by way of a percentage of my annual income.

For example, income is $100k per year, assetts are valued (RV) at 700K therefore the assett to income ratio is 7 to 1 or 700% of my income.

Income is $100k per year and debt is $580k therefore the debt to income ratio is 5.8 to 1

The difference being $120k in actual assetts or income times 1.2.

So, on April 1st I will post a figure which represents my net worth as a ratio of what my annual income is. I may purchase during the following year, I may sell during the following year. My goal is to achieve in excess of the figure 6 times my annual income.

I will work on RV's only (or GV's if you prefer) and, therefore, this year may be skewed as Christchurch had not had a Rating Valuation since 2007

Defination of assetts? Anything I consider is one.

Defination of Debt? Again, anything I choose.

This is a personal exercise which others may join or not.

[gavinc]

Keys - I do a similar stock take each year also - its very helpful as I can see where I am compared to previous years.
I concentrate on savings, mortgage debt, any other debt (usually only a few k on visa) and RV of the rental properties. I exclude my own house.

[BigRedDog]

Will you be including rent as income?
I don't think you will... but just wanted to confirm.

Also if I'm not being too nosy... can I ask why the goal of 6:1 ratio?

I might undertake a similar exercise.

[Rosco]

What are you trying to achieve?

Your formula uses two positives, net assets and income, so what does the answer give you?

ie income goes up to $200k, net assets goes up to $240k in a years time. Gives same figure of 1.2!! So 1.2 shows nothing. Income has doubled, net assets have doubled, but your figure shows no change.

Ross

[DazRaz]

I've been tracking interest paid each month. Have 10 years history. Linked to this, I have monthly tracking of interest as a percentage of rent received. Again 10 years of it. They make nice graphs a give a visual idea of progress.

[Keys]

PPOR is excluded.
Rent is excluded.
6-1 ratio as this is the first year I'm doing this ratio based exercise and savings of 6 times income is touted as the desireable outcome when you retire.

Ross, I wish!
Income doubling on my controll base would be nice but won't be achieved. Gosh, even a 3% wage rise would be nice in a year.

[speights boy]

and savings of 6 times income is touted as the desireable outcome when you retire.

Not sure whether I am talking about the same ratio as you Keys, but I have always used 25 times for year 1 retirement.

EG: Plan to spend 50k in year 1 retirement; therefore need 1.25m in net worth investments.
(or 50k is simply 4% of 1.25m so that's where the 25 comes from)
Assumes no debt.

Reasonably accurate in periods of 'normal' inflation and investment returns.

Many different ways to approach it of course.

[Rosco]

PPOR is excluded.
Rent is excluded.
6-1 ratio as this is the first year I'm doing this ratio based exercise and savings of 6 times income is touted as the desireable outcome when you retire.

Ross, I wish!
Income doubling on my controll base would be nice but won't be achieved. Gosh, even a 3% wage rise would be nice in a year.

I wasn't saying that your profit would double, or that you should aim for this. BUT if you had a fantastic year, doubled your profit and your net assets, your 1.2 ratio would stay the same. So obviously done extremely well, but ratio wouldn't improve as both factors have doubled.
Similarly if your income decreased to $50k and your net assets stayed the same. Your ratio would actually improve to 2.4. But this ratio improving wouldn't be a good think as you haven't improved.
So using a ratio of your income and your net assets doesn't work.

Your "I wish" comment, got me thinking about a business planning tool that I see often(lots of business coaches use and it is quite old). If there are 5 or 6 parts of your business, can you improve each one by 5%?
ie 5% more leads?
5% better conversion?
5% increase in average number of sales to a customer per year?
5% increase in average $ sale?
5% increase in Gross Profit margin?
5% reduction in expenses?

If you increase each of these small parts of your business, what does it do to your net profit? What % increase?


Ross

[Eugene]

In my experience accountants tend to just do tax compliance and not this sort of stuff. I would love some interpretation of my financial situation, such as what Rosco provides above.

[Rosco]

6 Ways to Improve Business Profits
						Current		Add 5%		Add 10%
Number of Quotes (customers shown)				1		1000		1050		1100
Conversion rate				2		25%		26.25%		0.275
Number of Customers						250		275.63		302.5
Average number of transactions				3		5		5.25		5.5
Average dollar spend				4		300.00		315.00		330.00
Total Income						$375,000		$455,815		$549,038
Cost of Goods Sold				5		75%		71.25%		68%
Gross Profit						$93,750		$131,047		$178,437
Expenses (% of sales)				6		10%		9.50%		9.00%
NET PROFIT						$56,250		$87,744		$129,024
							Increase of	56%	Increase of	129%
								Income is up		Income is up
								22%		46%

[Perry]

On April 1st each year, I will take stock of assets and debt and express
them here by way of a percentage of my annual income.

There HAS to be a reason you picked April Fool's Day, right?

[Perry]

Actually, your idea, Keys, made me wonder just how
many PIs do the proverbial seat-of-the-pants or back-
of-an-envelope thing? It often feels a bit hypocritical
when suggesting to people to do the numbers carefully,
when I have failed to do that, plenty of times, yet still
got through on a wing and a prayer and probably a lot
of good luck.

[Wayne]

As Ross suggests you will often end up with the ratio showing the wrong thing. Why not 2 % - % increase in wages year on year and % increase in net worth (net assets)?
To complicate things you could express these relative to the inflation rate to ensure you are at least beating inflation and actually improving.

[Keys]

The data will be for me, accurate for what I want to do and contain what I want it to contain. Since there seems to be so much diversity among those who are reading I will keep the data to myself and consider the posting of it would cause too many arguments.

[Wayne]

Keys - I'm not sure it would produce arguments - discussion maybe. I think people were only trying to help!