Just like with every business, you have certain KPIs like net cash flow, customer acquisition, burn rate etc. Have you ever thought you should have some personal KPIs. How do you know you’re at peak performance? What’s setting you back… do you need a tweak or a complete thrashing?
Here are three KPIs you can apply to your personal financial planning. Keep a track of these and it could be the difference between a comfortable life and rich life!
- Emergency Backup Fund (EBF) – If you haven’t got around to this, you should. Emergency Fund is the amount of money you need in case things go wrong. And $hit happens. (This is basically your MBR x number of months you need to be on your feet again). If you’re an entrepreneur – I sincerely suggest having this in place in addition to the next one.
- Eff Off Fund (FOF) – This is the amount you need in order to retire comfortably. You might want to name this more appropriately, but you get the picture. This is the amount you need to tell your boss to take a hike. (This is basically your MBR x 12 x 20, why 20 it’s assuming a normal investment would get you 5% yield, so take the inverse of that)
- Monthly Burn Rate (MBR) – No matter how much you save in the above two, everything will boil down to this one number. If you have a high MBR, you’re going to be need a good FOF and EBF in place. This is the amount you need each month to live a lifestyle you want to enjoy. This includes your housing, daily living expense, education, entertainment and even charity (be good). This one number tells you how much you need to earn and keep aside for saving and investing. And it also changes based on your age, and the stage you are in life. For example – bachelors, or just married couples and no kids have a different MBR than those who start a family. Even if you started a family, you now have the responsibility of ensuring the children are out of the house, which is when you’ll have the highest MBR. And after all your responsibilities are over, your final stage is when you don’t need to work unless you want to (I don’t believe in retirement) – this is also when your MBR is not as high as mid-life, but slightly more than early-life. Whatever the number, add a 10% to it.
Unfortunately, most people go through lives, working hard, saving, investing, pursuing wealth and yet have no clue about these numbers should be. And the Cheshire Cat said it so eloquently…
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
“I don’t much care where–” said Alice.
“Then it doesn’t matter which way you go,” said the Cat.
“–so long as I get SOMEWHERE,” Alice added as an explanation.
“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”
Yeah, work hard enough, save enough, invest enough, pursue enough… you just need to walk long enough.
Make the decision today, to calculate your three KPIs. Take these baby steps to start those funds if you haven’t. And have the goal so you don’t waste time running around like Alice in wonderland!