I regularly review my financial health. I use Quicken and I track all the movements of money. However, I don’t keep a budget and control the spending. I trust the family to spend responsibly on necessities and high quality wants. I do occasionally review after the fact to continuously calibrate the understanding of needs and wants. The important thing is that I’m not the “gatekeeper” of spending. I expect each person to be their own gatekeeper and apply good judgment on their spending.
My top line is financial assets to expense ratio. Here is how I calculate it: Divide (total financial assets) by (12 months of expenses - 12 months of passive incomes). Add up all the cash, stocks, bonds, cryptocurrency, and other financial instrument assets (that can be easily sold and converted to money). Don’t include real estate, primary residences, or other assets that’s tied to physical assets. Then I add up the last 12 months worth of expenses: dining out, grocery, utility, vacation, taxes, loan payments, etc. Every bill that I have to pay and every dollar spent. Then I subtract the last 12 months of passive income or residual income generated by real estate or other contracts and physical assets. Don’t include any income from any financial assets (dividend, interests, etc). This is the napkin math on how many years that I can very conservatively retire. This is the number that I want to grow year over year.
Next I review metrics that positively contribute to the top line: cash flow and rate of return on financial assets. I use simply cash flow = total income - total expense for the last 12 months. And I use a simple rate of return: percentage change on the total value of financial assets 12 months ago vs today. I review top expense categories and regular subscription in cash flow. And review the allocation of my financial assets and my returns vs general market performance such as SP500.
Next I review the top 2 factors that are the biggest drag on the top line: cost of debt and effective tax rate. I review to make sure my rate of return is better than the most expensive interest on my cost of debt. I will make occasional adjustments to find lower cost of debt or allocate my cash flow to pay down debt vs investing. I also regularly schedule a tax review with my tax advisor on projected tax due. My personal pet peeve is getting a tax refund. I don’t want to give the government an interest free loan and definitely don’t pay more than my legal obligation.
What are your financial KPIs?
Ricky
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