Do You Prefer Borrowing Money To Saving It?
June 21, 2009 – 6:08 am
I was reading Master Your Money by Ron Blue again (I like this book), and I picked up on something interesting.
Ron uses two personal financial ratios when working with clients. The first he calls the “propensity to borrow”, and it’s calculated by dividing your assets by your liabilities. For example, if you only have a mortgage and own $200,000 on a house worth $250,000, your ratio is 200/250 = 0.8. This means that you’re 80% more likely to borrow than to save up for a purchase. Likewise once you’re debt free your ratio will be zero.
Your Propensity to Borrow ratio is an easy way to track your progress to become debt free in my opinion because it takes into account asset value growth or loss, debt repayments, and new debt. Some people have goals other than being completely debt free (including their home), and therefore tracking their total level of debt isn’t very useful. By tracking this metric over time you can see if your debt load and investment returns are moving you in the correct direction.
The second ratio is called the Propensity To Accumulate, and as you might have already guessed it’s calculated as net worth divided by years of work. If you’re net worth is $75,000 and you’ve been working 16 years then on average you’ve been accumulating 75,000/16 = $4,687/year. Not bad!
As your investments (hopefully) continue to grow and compound, so this metric will continue to improve rapidly the further out into the future we go. If fact your last few years before retirement will probably be worth more financially than your first five or ten years of savings! This metric is useful simply because it shows you how much progress you’ve made financially during your working lifetime. The number might be good or bad, but at least know you have an annual target that will indicate an improvement or decline in your financial well-being.
Image Credit: omar omar
If You Liked This Post Then Please Check These Out...
|
1 Trackback(s)