Define the Elements
Tax Planning • Estate Planning • Financial Independence • Cash Flow and Debt Management
Director of Financial Planning • Enrolled Agent • Advisor
Here at BBK, we use an app called Elements to provide you with a quick snapshot of your financial health. Elements provides you with your own financial “scorecard” which can be used to track important metrics over time.
The scorecard is a great way to identify any underlying issues or focal points that should be addressed. If you’re not sure whether you need a financial advisor, this tool is a great place to start.
This page is your guide to each of the Elements, including how they’re calculated and why they’re important. The more familiar you become with these elements, the more you can see how each of them relates to other areas of your finances and how certain changes can help you reach financial independence.
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Financial Independence
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Total Term
Total Term is simply your net worth divided by your annual living expenses (including debt payments). It can help you hone in on how long you can live off of your assets if you stopped earning today. Your target for Tt is unique to your situation, and as a financial advisor, one of my main objectives is to help you pinpoint this number so you know how to focus your actions.
Cash Flow & Debt Management
Can I make my income more efficient?
The next four elements are all expressed as a percentage of your annual gross income. Ideally, these should add up to 100% since these are the primary areas where your income is allocated.
Savings Rate
If you want to grow your net worth, your savings rate will be your main tool. A higher savings rate helps you achieve your goals faster and results in greater financial health.
Burn Rate
Your Burn Rate tells you what amount of your income is being spent on expenses and debt. We are often asked “Am I spending too much?” After determining your burn rate, you’ll have a much better answer to that question. Burn rate is often the most difficult number to identify and most folks aren’t super confident in estimating what they’re spending. You can start to approximate spending by looking at the following formula: Income – savings – debt – taxes = burn rate, but there are great benefits to understanding your spending at a more granular level.
Debt Rate
Other common questions we receive are “Do I have too much debt? Am I using good debt?” We’re all aware of the dangers of carrying too much debt. Those on-going debt payments hurt our ability to save for our goals. However, certain types of debt can actually help you in reaching your goals. The way debt is managed is just as important as how you invest your savings.
Tax Rate
Am I paying too much tax? Of all the cash flow items, this one tends to overwhelm people the most. But, by being proactive, you can take advantage of plenty of opportunities to reduce your tax bill. Developing a proactive, long-term tax planning strategy can significantly improve your financial health and your ability to reach your goals.
Interested in a comprehensive tax return analysis? Schedule a working session NOW
Asset Allocation
Do I have the right combination of assets?
We talked about the Total Term score above which helps give a better understanding of your overall financial health and retirement preparedness, but the next few Elements will help further break down your net worth, each having important caveats.
Liquid Term
Do you have enough funds on hand to meet emergencies? Your Lt score totals up your liquid assets (checking, savings, CDs, money market, & taxable brokerage accounts) and represents how many years your emergency fund could last. These assets are those that can be accessed anytime, without penalty, for any purpose.
Qualified Term
What does my retirement health look like? Investing in retirement accounts can have major tax benefits today and in the future. Your Qt score tells you how many years you could live on your qualified retirement accounts (like 401ks, IRAs, etc.). There are lots of ways to view these qualified accounts and, ultimately, the right mix will depend on your specific situation and goals. Keep in mind that there are certain restrictions on how and when you can use these funds (but also strategies for minimizing their impact, should you need to access them sooner).
Real Estate Term
For most Americans, their home is their most valuable asset. Some investors also invest in rental real estate as well. Rt represents how many years you could live on your real estate equity (i.e. market value minus mortgage debt). Having too much money tied up in real estate means you could have trouble accessing this money for other financial goals. The key is finding the right balance for your situation.
Business Term
Own a small business? Your Bt tells you how long you could live on your business’s equity (business value minus business debt). Your business may provide substantial income for you and your family. But, it’s important to avoid concentrating too much wealth in a business. Just as with real estate, having a lot of equity tied up in a business could make things difficult if/when you need assets to fund other financial goals (retirement, travel, etc.).
There’s a difficult balance between investing in your business and investing in other areas. Your business may have been the contributing factor towards your overall net worth but you should also consider how to protect that wealth and transition it to financial independence later in life. Lastly, be aware that being a business owner exposes you to additional risks as well as significant opportunities for wealth creation, satisfaction, and impact.
RISK
Am I taking enough risk? Or too much?
Equity Rate
Another common question we get is “Am I taking too much or too little investment risk?” Your equity rate tells you roughly how much investment risk you’re taking (how much of your wealth is invested in stocks). Over the long-term, stocks have great growth potential, but they also experience much higher fluctuations in the short term compared to other investments. The “right” amount of investment risk for you will depend on your specific situation, what you’re comfortable with, and what you’re working towards.
Insurance Rate
Your insurance rate measures how much insurance you have relative to how much you may need based on things like income, spending, debt, etc. Keep in mind that if you have people who are financially dependent upon you, then insurance will be an integral part of your financial plan. Like investment risk, the “right” amount and type of insurance is subjective.
Estate
Have you thought about how your assets will be handled if you pass away? What about medical & financial decisions if you’re unable to make those decisions yourself? An estate plan is a core part of every financial plan but it’s often the most overlooked area in personal finance, no matter your age.
Common estate documents include a will, medical directives, living will, etc.
Executive Summary
The more familiarity you have with these twelve elements the more you start to see their interactions with each other, and the impact they have on your financial life and its many convergences with your lived experiences and relationships. It’s important to remember that you are not the sum of your financial metrics nor are you defined by the contours of your net worth; however, if you’re open to it, it’s amazing how quickly a discussion about ostensibly sterile financial matters can lead to deeper discussions about personal values and limitations, social and emotional issues, and bigger questions around the purpose of life itself.
What does your financial health look like?
Get started with our easy-to-use mobile app to create your own scorecard, and we’ll follow up with a free assessment by email
Working • Freelance • Retirement Ready • Retired
Cody Lachner, CFP®
Cody is a Lafayette-based financial advisor and joined the team in May of 2022 as our director of planning. Cody serves his own clients and guides the enhancement of BBK’s financial planning department.
He was born and raised in northwestern Indiana and is a proud alumni of Westville High School and Purdue University.
Cody is an Enrolled Agent (EA) with the IRS which enables him to provide guidance and communicate with the IRS on tax matters on your behalf. He has also earned his Masters degree in Personal Financial Planning.
Cody, and his wife, Julia, are a very active couple. They love the great outdoors and their adventures have taken them on multiple backcountry trips in Alaska.
Cody’s primary areas of specialization are in helping folks plan for early retirement (Financial Independence, Retire Early). He has helped many families become financially independent so they can spend more time pursuing their own outdoor interests.
Please visit dispersed.io to learn more about Cody and his pursuit to help folks become financially independent.
