Here are my top-level financial objectives for Year 2003:
1. NET WORTH
Current (End of 2002) = $78,967
Goal = $110,000
Stretch Goal = $115,000
Net Worth is defined as the aggregation of values of all asset types, including checking and saving accounts, brokerage accounts, retirement accounts (401k and Roth IRA), car and house, minus the aggregation of values of all liabilities, including credit card balance, payable accounts, tax liabilities and other outstanding loans (i.e. mortgage).
2. LIQUIDATION VALUE
Current (End of 2002) = $77,317
Goal = $108,000
Stretch Goal = $112,000
Liquidation Value (LV) is the value of all assets if liquidated to cash in a relatively short timeframe. It is based on net worth but subject to the following adjustment rules:
- 401(k) Account: LV = 80% of account balance to account for income tax and/or premature withdrawal penalties.
- Roth IRA Account: LV = 100% of original contribution amount + 20% of gain/loss to account for income tax in the case of premature withdrawal.
- Car: LV = 95% of market value to account for difference between trade-in price and market price.
- House: LV = 93% of market value to account for 6% average commission and 1% sales tax.
3. ABSOLUTE ANNUAL RATE OF RETURN (Absolute ARR)
Goal = 8.0%
Stretch Goal = 10.0%
Absolute ARR is calculated by using the XIRR function in Excel. It applies to all actively managed investment accounts, including ordinary brokerage accounts and Roth IRA but not 401(k) account, ESOP and ESPP accounts.
4. RELATIVE ANNUAL RATE OF RETURN (Relative ARR)
Goal = +3 pts
Stretch Goal = +6 pts
Relative ARR = Absolute ARR - S&P 500 change in the same time frame. It applies to all actively managed investment accounts, including ordinary brokerage accounts and Roth IRA but not 401(k) account, ESOP and ESPP accounts.
5. EXPENSE SAVING %
Goal = 2%
Stretch Goal = 4%
My 2003 budget includes a budget of $42,142 of living expenses, including all auto (including depreciation), baby care, entertainment, household, meal and groceries, rent and utilities, other expenses and discretionary expenses. Income tax and FICA tax are excluded from this calculation. Expense saving % = 1 - actual spending / budget of $42,142.
6. EPS SAVING
Goal = $400
Stretch Goal = $600
This metric includes all savings from multiple EPS (aka earnings-per-share :-)) initiatives. An EPS initiative can either be in the form incremental income (other than salary income and normal investment income), or in the form of living expense savings (compared with the baseline number in the year of 2002). All savings need to be actual realized savings in the year of 2003.