Not Rich Yet | Managing higher incomes

CAT | Set & track goals

As you budget and plan for the the future, I would like to recommend several metrics for you to consider.

Maintaining liquidity

Cash / Monthly regular expenses

This tells you how many months you could survive a total loss of income; ideally this should be at least as long as it would take you to find a new job from scratch plus several months safety buffer, e.g. 6 months

Cash  / emergency expenses

Similar to the metric above, this is helpful if much of your expenses are discretionary or driven by your current occupation. For example, if you rely heavily on a nanny, you may be able to do with-out and avoid the expense if one of you loses their job.

Dialing-in your savings rate

Total annual savings (cash savings + retirement savings + debt principal retirement) / Gross annual income

This metrics tells you how much of our income you are effectively saving. See my post on  “How much should I save?” to understand what this does to your retirement outlook.

Managing your portfolio

Asset breakdown

While most people look at the breakdown of their investment portfolio, they often forget to include their other assets. The following breakdown allows you to avoid over-investing in one specific area:

  • % in liquid assets (cash and equivalents)
  • % in short-term investments (CDs and other assets that can converted into cash for a small fee or within 3 months)
  • % in real-estate
  • % in long-term and retirement investments

Overall financial health

Networth (Total assets less total debt)

Following the evolution of your networth is a healthy thing to observe. Watch it go up or down and understand why. Some people argue that you should exclude the value of your home here – I think either including or excluding your home is fine as long as you are consistent.

Networth less home equity/ annual expenses

This metric helps you gauge your readiness for retirement. Your retirement “nest egg” should be large enough to throw off a sustainable income stream. Common rules of thumb propose a 20x value here, but that assumes that your expense rate is sustainable in the future. This is likely not true since your healthcare costs and life-style creep will lead to higher expenses after retirement.

Networth less home equity / net income

Similar to the metric above, but it takes a more conservative approach by assuming you are attempting to replace your income instead of your expenses. A typical recommended value here is achieving a of value of 20x here.

What metrics do you use?

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