Unlock 10 Key Stress Tests for Your Financial Plan

Today we’re talking about ten stress tests of a good financial plan. So, the first thing that I recommend looking at is how well you control your money temperature versus how much your money temperature dictates how you live your life. So let me give you an example. So, money temperature is defined as what do you spend on a monthly basis because you need to, and what do you spend on a monthly basis because you want to? How well you have that in control? And as you get raises, as you have bonuses come in, what are the decision making around that? So, instead of having an excel spreadsheet where we track every single thing you possibly spent money on, a good rule of thumb for your money temperature is looking at a minimum, 25% of your gross income.

So, for example, if you’re making $400,000 a year gross, a minimum of $100,000, 25% gets invested for future either short term, midterm or long term goals. And generally for long term, as far as financial independence, a minimum of that is 15%. So if you are doing that on annual basis, including bonuses, including stock bonuses, et cetera, generally you have a good control of your money temperature. A lot of people are able to go much higher than that 25%. But if you dip below that, then lifestyle creeper, lifestyle inflation may be getting in the way. The second thing we look at is an 80 20 rule. So if you look at your entire balance sheet, making sure that all of the assets you have, at least 80% of your money, is a goal defined asset in relationship to your financial plan.

Is it for college, is it for retirement, is it for a specific a vacation house or a down payment on a house? And then only 20% of your assets are tied up into assets that actually require your time, more resources. So, for example, if you’re in a private investment and there’s capital calls, if you’re in a house that requires all kinds of maintenance, this 80 20 split is something that we really look for as a good measure of financial health. 80% of your assets working for you, low stress, they’re liquid. They’re there to support your life. By design, only 20% of your assets, whether it’s because of a private investment or a lifestyle asset that you’ve chosen that could potentially suck money away from you, we recommend to keep that below 20% of your net worth. Third is cash flow is king.

So, looking at what is the consistency of the cash flow if you’re a w two and you have a high cash flow just from income, if bonuses are coming in? Are we dependent on that bonus? Is it consistent? Or if you’re a business owner, how consistent is your cash flow? The fourth thing is also looking at then future cash flows that you’re creating, whether that’s passive or active income. The fifth thing is your investments. Are you following the three pillars of investing that we refer to asset allocation diversification, and then having everything that you put into the equity markets defined as long term or really have a lifetime horizon, time horizon attached to them? The 6th thing is how well is your time and your privacy protected as you grow your balance sheet? The 7th thing is lifetime percentages.

So in general, we recommend percentages that you should spend in different categories and making sure you have these really dialed in and these can be adjusted as far as your preferences. Some people prefer a big house, some people prefer flexibility in travel. So we tailor make those for each client and make sure that they stay in check. So ultimately you cannot look back with any regret and not wonder are my overspending? Or on the vice versa? Am I underspending? Am I going to accumulate unnecessary amount of net worth and look back in my thirty s, forty s and fifty s with regrets on more trips and more fun experience I could have had? So that’s a paradox that needs to be managed. It’s not a problem to be solved. And that’s the best thing about a good financial plan can do.

It’s not just solving the problem of I want to fund my kids college, I need to save x amount. It’s managing the paradoxes that come along the way. That’s a very important one. The 8th thing we look at is are you following our debt rules? So for example, would be a house. There’s two rules we have in place. One, total cost should be no more than 30% of your net income. So if you’re as a family, after taxes, 401K contributions, et cetera, bring home 20,000 a month. 30% of that would be 6000 a month. Or your total housing costs, print interest, taxes, insurance. In that example, 30% of 20 will be 6000 a month. And also, is your house valued no more than two times your gross income.

So for example, if you have a half a million dollars of income, two x that will be a million. Now the problem here is that banks are going to offer you a ton more, probably 50 or even double 50% or even double the amount I just quoted. So it takes a lot of discipline to realize that anything above this will probably create a lot of tension in your plan. A lot of inflexibility and ultimately where a lot of people today feel is house poor. So if you follow those two rules, the general rule of thumb is could you afford more? Yes. But if you want to have a good financial plan on solid track for early financial independence, college savings, things of that nature, following those two rules is going to be your path to freedom.

To also get those other goals on track, live presently today and also navigate not having a regret later. 9th thing we recommend a good stress test or good financial plan is looking@your.net worth if you’re in a high income, I think it’s a very reasonable thing to say is usually to look@your.net worth by age group in America and make sure you’re in the top 10%. Being in the top 1% probably means you’re overly saving and not focused enough on the present today. But the 10% I found through experience is usually a good temperature gauge of managing the paradox of accumulating versus spending. You have a very healthy relationship with your money. You’re very disciplined in saving it, but also very thoughtful and intentional about your lifestyle today, knowing that tomorrow was never guaranteed.

The 10th thing is just literally looking through everything on your balance sheet and being able to say, this is here because fill in the blank, meaning every asset has a job description. If it doesn’t have a job description, ask yourself why I invested in it and would I do it again? And that can help you calibrate good decision making that supports your life by design in the future. So those are my top ten things to measure. Stress test of a good financial plan.