Forget FICO! What's your PF Score?

[Will]

Just read an interesting article here http://jlyblog.wordpress.com/2013/10/13/the-new-score-that-outweighs-your-credit-score/ that suggests that FICO scores don't really show you a number you need to know and proposes a new one instead:  your Personal Finance (or PF) Score.

The new score that I’m proposing is called the PF Score, or Personal Finance Score. This is measured by taking 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, when you owe more to others than the cumulative total of all your personal assets.

PF Score = Net Worth / Annual Spending

What do you think?  Do you like your PF score?

[shuffler]

This is the same thing as determining (what would be) your withdrawal rate, right?
I mean, the way you write it the "score" is the inverse of the withdrawal rate, but ti's still the ratio of AnnualSpend to NetWorth.

So if you "score" 3% or 4%, then you're FI.

[NumberCruncher]

This is the same thing as determining (what would be) your withdrawal rate, right?
I mean, the way you write it the "score" is the inverse of the withdrawal rate, but ti's still the ratio of AnnualSpend to NetWorth.

So if you "score" 3% or 4%, then you're FI.

Yeah, same general idea - for 4% withdrawal rate, your score would be 25 here (1/0.04).

[jly224]

You guys got it. It's that simple, I just took the inverse and gave descriptors to a few scores with the goal of giving people something to work towards  score wise that didn't involve giving their money to banks in the form of interest. If I knew how to come up with a score that involved others giving me money I would have written about that. ;)

Also it's a great equalizer, because you can have a huge income, and huge expenses, thus receiving a low score. Or have a relatively lower income and well controlled expenses and have a much high score.

[arebelspy]

My score is 25, but I'm only just over halfway to full FI, due to future expenses being about 2x current expenses.

It's hard to take everything into account with a single number.

[JohnGalt]

Interesting... but why are these numbers even in the same discussion, particularly as mutually exclusive? One is meant to be a measurement of credit worthiness based on history of repaying short and long term loans, the other is a measure of financial independence.

[jly224]

The reason these numbers are in the same discussion is because I presented in my blog post an argument for why the personal finance score is more important than your FICO Score. The FICO Score is stressed about so much these days when in reality it isn't nearly as important as the new score I propose measuring how close you are to financial independence.

One is a measure of your money's ability to work for you and cover your expenses, the other is a measure of how much and how often you hand your hard earned money over to the banks.

[shuffler]

I hate to be contrarian on the internet, but ...

One is a measure of your money's ability to work for you and cover your expenses ...

Not really.  That net-worth money could be held in cash and losing out to inflation every year.

... the other is a measure of how much and how often you hand your hard earned money over to the banks.

Not really.  A lot of people around here use credit but pay it off each month, thereby achieving high credit scores and not handing any hard earned money over to the banks.

I get your enthusiasm for trying to get people to pay attention to their spending vs. net-worth.
I just wouldn't pit these two measures against one another.  They're too different, and there's no reason that one must "win" over the other.

[JohnGalt]

The reason these numbers are in the same discussion is because I presented in my blog post an argument for why the personal finance score is more important than your FICO Score. The FICO Score is stressed about so much these days when in reality it isn't nearly as important as the new score I propose measuring how close you are to financial independence.

One is a measure of your money's ability to work for you and cover your expenses, the other is a measure of how much and how often you hand your hard earned money over to the banks.

I guess I've just never run into someone who measured their financial well being based using FICO score.  If that were the case, they would certainly be better off using something like PF score (and are probably very misguided on a number of other facets of personal finance). 

As far as lenders go, I don't think PF score would be a sufficient replacement for FICO on it's own. 

[arebelspy]

I guess I've just never run into someone who measured their financial well being based using FICO score. 

People do it.  Generally people bad with money.  I've seen it on sites like GRS.

In terms of "financial well being," the PF score is definitely a better measure of how you're doing than your FICO score, but like you and shuffler point out, they measure different things, so of course one will be better than the other at the thing it's designed to measure.  :)

[SwordGuy]

We're a 16.5 at the moment.

In 5 years, my DW's SS will kick in, which will reduce the amount of income the assets need to provide even though my expenses will be the same  (Something not included in the measurement, but that's a quibble.)

At that point, with the same savings track we're on, we'll be at 23.

But effectively we'll be at 48 once we subtract out the expenses the SS income can handle, and that's a conservative estimate that assumes no investment earnings above inflation.

That's when we both intend to declare FIRe (too old to call it FIRE given my honey's age, and it will be just a bit early for me).

[Nords]

Forget FICO! What's your PF Score?

800 and useless, since I'm not borrowing money or paying for excessive insurance. 

60 and rising.

You guys got it. It's that simple, I just took the inverse and gave descriptors to a few scores with the goal of giving people something to work towards  score wise that didn't involve giving their money to banks in the form of interest. If I knew how to come up with a score that involved others giving me money I would have written about that. ;)
Also it's a great equalizer, because you can have a huge income, and huge expenses, thus receiving a low score. Or have a relatively lower income and well controlled expenses and have a much high score.

Hey, screw the complainypants nitpicking comments from the other posters.  Kudos to you for coming up with a great way to simultaneously present these two concepts in a new and different way, and to help people focus on their motivation for financial independence.  All bloggers aspire to this, few achieve it often enough.

I've also never had one of MY posts picked up by Jay Money... not that I'm envious or anything!
http://rockstarfinance.com/

[MrsPete]

Forget FICO! What's your PF Score?

800 and useless, since I'm not borrowing money or paying for excessive insurance. 

I agree with "useless".  One of my goals is never to borrow another penny for the rest of my life, and I've been with the same insurance company since I was 16 years old and first had a driver's  license (I do value being able to call  up, give my name and be recognized immediately). 

I guess I used to buy into the myth about credit scores mattering . . . because I know that when we were in our early 30s we borrowed for a car (last car we ever financed), and the person handling our loan looked at our paperwork and commented, "Wow, we don't see many PERFECT credit scores.  We see good scores, but not PERFECT."  A few years later, once we paid off our mortgage, we had some reason to look at our credit score, and we were surprised to see that it had GONE DOWN.  It made no sense.  We were better off financially.  We owed nothing to anyone.  We were now able to keep 100% of our take-home pay.  We were MORE financially stable, but because we no longer had a mortgage, our credit score went down. 

From that moment on, I saw these scores for what they really are, and I never cared about them again. 

[AlanStache]

FICO is intended to rate risk of default on "small" loans, not asses ones over all financial situation.  This alternate measure would see more useful for the big picture.  But just because you have 2mil in the bank does not mean you wont blow off a 2k cc bill (thinking Loto winners not MMM readers here).  So I guess they both would serve a use.

Few years ago coworker and I were each buying homes and while bsing with the boss-man found out our credit scores were good bit higher than his.  We all had a good chuckle with it.

[simonsez]

Forget FICO! What's your PF Score?

800 and useless, since I'm not borrowing money or paying for excessive insurance. 

I agree with "useless".  One of my goals is never to borrow another penny for the rest of my life, and I've been with the same insurance company since I was 16 years old and first had a driver's  license (I do value being able to call  up, give my name and be recognized immediately). 

To each their own.  I like a "free" month of float with my financial obligations when paying my credit cards.  There are also some great deals out there for things I would be spending money on anyway that I would not have access to unless I was borrowing money via credit cards (e.g. 5% back on groceries).  Not saying you need to have an 800, but I find my FICO is not useless since it allows you access to better credit cards.

As for my PF score…..no comment.  Working on it!