Thursday, January 25

No Salary, No Savings Rate?

One of the things that I find challenging about my personal finances as they have evolved to the present day is that I do not have a salary. Because I am self-employed, all my income goes to my corporation and I am paid from the corporation - mostly in dividends but partly in salary. But the amount of pay I receive is sort of whatever I feel like, with the advice from my accountant to try to keep it low, so my personal income can be different every month.

Also, my corporate income definitely IS different every month. My corporate income is whatever I bill, and my hours vary sometimes quite a lot.

So when I read other bloggers talking about their personal savings rate, I am sort of jealous and sort of confused. I don't think that I can calculate a personal savings rate in any meaningful way. I mostly spend everything I take out of the company. If I am able to save it means I am withdrawing too much and I should take out less the next month.

However, of course I am saving inside the company. My personal assets consist of my house and some RRSP's left over from my regular working days. More than half my net worth is tied up in the value of company, which is sitting in corporate bank accounts and investment accounts.

So today I decided to try to unlock my personal savings rate by looking at my corporate financial statements. My first guess was that if I take my corporate income for the year and compare it to my increase in corporate assets for the year that should give me some idea. So I pulled out my 2005 financial statements and tried to do this. It was really difficult! Do I use my complete revenue number or do I deduct out expenses? Which expenses should I remove? Some gave me personal benefit and all of them reduced my savings but the largest expense was subcontractors and that definitely was money that was never mine to save. Do I deduct income taxes? Ouch! My head hurts...

Finally I decided to use: Income minus expenses but not taking off taxes. $106,000

Okay, now to the gain in assets. I turned to the balance sheet and realized that it has to be assets less liabilities but this is much more straightforward. Retained earnings is shown at the bottom and that will be the numbers I will use.

Retained earnings went up by $47,000 in 2005. That gives me a 44% savings rate. Pretty good. Too good?

How about income minus subcontracting expenses only: $128,000
This gives a 37% savings rate. Still quite good and perhaps more accurate? Maybe.

This was a good little exercise for me to do, and I liked it so much that I pulled out 2004 and found rates of 43% and 32% by comparison. So perhaps my savings rate improved in 2005 over 2004.

I am now looking forward to getting my 2006 taxes done so that I can look at how I did in the most recent year. Because of my move to a new house this year I feel like I spent a lot of money, but some of that was out of my home equity, so the numbers may not reflect this.