Unsure About Your Financial Horizon?

Welcome to this week's edition of The Weekly Trail Report, where we share,

1 Story, where real stories of architects and engineers meet tailored financial strategies,

1 Actionable Tip, to provide actionable insights and guide you towards financial success,

1 Financial Term, to demystify key concepts and empower your decisions.

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1. Story: Howard Charts His Course with Financial Metrics

When Howard first came to me, his financial situation was like a ship navigating through foggy waters. An accomplished architect with his own thriving practice, Howard had solid earnings but felt adrift when it came to long-term financial planning. "I can see my immediate surroundings, but I'm unsure about the horizon," he explained, clearly concerned about the future.

"Let's clear the fog by charting your course using precise financial metrics," I suggested as we laid out his financial documents across the table. We started with the Savings Rate—the portion of income he was saving each month. "This rate will set the speed of your journey toward financial landmarks," I explained. Initially, Howard was saving about 10% of his income. We aimed to optimize this to 20%, enhancing his financial accumulation significantly.

Next, we examined his Debt Rate, which reflected the amount of his income dedicated to debt repayment. "Consider this the drag on your ship; reducing it will let us sail smoother and faster," I noted. Howard's debt was a mix of business loans and a mortgage. By refinancing some of his higher-interest debts, we planned to lower his Debt Rate, freeing up more funds for investments and savings.

We then calculated his Total Term, defined as the number of years Howard could maintain his lifestyle solely from his assets if he stopped working today. "This tells us how long your provisions can last in open waters without fresh supplies," I described. Initially, Howard's Total Term was roughly 7 years. With a strategic investment plan, we targeted to extend this duration substantially.

For his Liquid Term, we determined how long he could sustain his current lifestyle using only his readily accessible assets. "This is your emergency stash—how long you can keep afloat if all income streams dry up suddenly," I pointed out. Howard's Liquid Term was under a year, prompting us to focus on boosting his liquid savings to cover at least two years.

Quarterly reviews became our routine, serving as Howard's navigational checkpoints. These metrics, acting as his financial compass, not only showed his current positioning but also illuminated how changes in his financial behavior influenced his journey towards his goals.

Reflecting on the progress made, Howard expressed newfound confidence: “I've gone from navigating by sight alone to having a reliable compass and a clear map. Now, I'm not just drifting; I'm steering confidently towards my future.”

2. Actionable Tip: Maintain Adequate Liquidity

Ensuring you have enough liquid assets is crucial for financial stability and flexibility. Liquidity refers to how quickly and easily you can convert assets into cash. Maintaining adequate liquidity is not just about having cash in the bank; it’s about having access to funds when you need them, whether for an emergency, an investment opportunity, or unexpected expenses.

Here’s how to maintain adequate liquidity:

1. Identify Your Liquid Needs: Estimate how much money you need for immediate or short-term expenses. This includes regular monthly bills, emergency fund contributions, and any planned large purchases in the near future.
2. Create a Liquidity Buffer: Aim to keep enough liquid assets to cover at least 3-6 months of living expenses. This buffer can provide peace of mind and financial security in case of sudden job loss, medical emergencies, or other unplanned expenditures.
3. Use High-Liquidity Accounts: Keep your liquid funds in accounts that allow easy access, such as savings, money market, or brokerage accounts. These should offer stability and immediate availability.
4. Review and Adjust Regularly: Your liquidity needs may change over time due to changes in your income, lifestyle, or financial obligations. Regularly review your liquidity status to ensure it still meets your current needs.
5. Balance Between Liquidity and Returns: While it’s important to have liquid assets, also consider the opportunity cost of holding too much cash, which might yield lower returns compared to other investments. Find a balance that suits your risk tolerance and financial goals.

By maintaining adequate liquidity, you can ensure that you’re prepared for the financial demands of both today and tomorrow.

3. Financial Term: Total Term

Total Term is a financial metric that shows how many years you could live off your assets if you stopped working today. It is calculated by dividing the total value of your assets by your annual expenses:

How to Calculate Total Term:

1. Add Up Your Assets: Include savings, investments, retirement accounts, real estate, and any other valuable assets.
2. Calculate Your Annual Expenses: Sum up all your yearly spending, including both fixed costs (like rent or mortgage) and variable expenses (like groceries and entertainment).
3. Divide Assets by Expenses: This gives you your Total Term, showing how long your money would last without new income.

Why Total Term Matters:

The goal is to reach a Total Term of 25, which suggests you could likely live off your assets comfortably. As your Total Term increases, it grows faster due to compounding—your investments generate more returns, further extending how long you can live off them.

Knowing your Total Term helps you plan better and move confidently toward financial independence, making adjustments as needed to ensure a secure future.

Happy Trails,

Ryan

Disclaimer: We employ fictional characters to illustrate financial concepts faced by individuals in the architecture and engineering industry. Any resemblance to real persons, living or dead, is coincidental. While the stories are inspired by our experiences, the specific details, circumstances, and outcomes mentioned are entirely fictional and created for educational purposes only. Real client information is strictly confidential and never disclosed without explicit consent. Our aim is to provide relatable examples for educational purposes, respecting the privacy and confidentiality of our clients.