Part 2 of 2-Part Series
Annual Personal Spending is fairly self-explanatory and a term we’ve touched on a number of times, so we won’t dive deeply into that. However, it’s important to realize that this number is essentially the dollar value put on your current lifestyle. By taking your total business equity and dividing it by your personal spending over the year, what you are left with is a value which is simply, years. The BN tells you exactly how many years you could survive in your current lifestyle if the business was sold or liquidated and you had to live off this equity alone. For example, if your equity in your business was 1 million dollars and your annual personal spending was $50,000, you would be able to live your life without changing a thing for 20 years.
his information in the formula is also very insightful into how much of your total net worth or wealth is tied up into your business. This can be very important to know, because as you know, at Kismet, the way we manage your wealth is by taking every aspect of your financial life into consideration. We manage the risk of your total wealth and the position and value of your business is an integral part of this. If you have a very successful, but volatile business which holds most of your wealth, this can be looked at as a high-risk investment in a sense. Diversifying your wealth could potentially be a smart play so you are at a low risk of losing most of your wealth. However, that is just a specific scenario because if you have a very successful and stable business, it can be the best investment for your wealth. There’s no cut and dry formula to determine how much of your wealth should be tied into your business, but it’s information which needs to be known and considered by your financial advisors.
As with all our formulas, the business ratio is applied to your financial management along with a multitude of other factors, each which shine light on different areas. As a business owner, this one is integral to the planning of your wealth in our holistic, multifaceted approach.