I hope everyone enjoyed the holidays and had a great end to 2023! My holiday break was filled with sugary desserts (thank you to my wife for the four pies she made), drinks aplenty, and a lot of lounging. I doubt I was alone in these activities. It’s probably no shocker based on this holiday binging that once the calendar turns over to a new year, many of us begin our fitness related resolutions. This year, I am proposing you set some financial health resolutions as well. I’ll even make it easy for you by laying out some steps. Below are financial “exercises” you can implement today.
Exercise 1, “Stretching” – Before engaging in exercise, you must get your body ready. Financially, this means taking inventory. Map out your assets, liabilities, income, and expenses. Create your own personal balance sheet and income statement.
Exercise 2, “Warmup” – Let’s start slowly before we get into the heavy lifting. In personal finance academia, there are three metrics you should know to measure your cash flow health. Use the income statement you prepared in the “stretching” exercise to calculate the following ratios.
- Housing cost ratio: Divide your monthly housing cost (mortgage, property taxes, and utility bills) by your pre-tax (gross) monthly salary. A rule of thumb is that your housing cost ratio should not exceed 28%.
- Consumer debt ratio: Divide your monthly debt payments (car loans, student loans, and personal loans) by your after-tax (take-home) monthly salary. Your consumer debt ratio should not exceed 20%.
- Total debt ratio: Now add up your monthly housing cost and monthly consumer debt and divide this number by your gross monthly income. Your total debt ratio should not exceed 36% of your pre-tax (gross) monthly income.
Exercise 3, “Cardio” – Cardio promotes a healthy heart and longevity, and the same can be said about one’s savings rate. While working, you should be saving for short-term goals and emergency needs; medium-term goals like home updates, college for the kids, or a car purchase; and long-term goals like retirement. Having your trusted advisor prepare a financial plan that encompasses all your goals will show the changes you need to make today in order to reach them.
Exercise 4, “Weightlifting” – You lift weights to build stability and muscles. You invest your capital to reach your goals more efficiently and build stability for your future. Are you investing your excess cash flow each month? If so, are you making the appropriate choices? Confirm with your financial advisor that your investment selection aligns with the purposes of the dollar you are putting to work. Review your overall allocation (stocks, bonds, and cash). I believe that short-term needs should be in cash and bonds, medium term needs in a mix of all three, and long-term needs should be almost entirely in stocks.
Exercise 5, “Cool Down” – Now it’s time to summarize all the work you did above. Track your cash flow ratios as your situation changes. Revisit your investments throughout the year to determine if your allocations need to shift. Keep investing through the many market corrections and bull markets ahead of us. Tracking and monitoring is an important part of keeping your financial health in check.
Crack open a beverage of choice, as you deserve it for keeping yourself financially fit! Or maybe go hit the gym…yeah, that’s probably the smarter choice.
Have a happy and prosperous 2024!
The opinions and analyses expressed in this newsletter are based on Curi RMB Capital, LLC’s (“Curi RMB”) research and professional experience are expressed as of the date of our mailing of this newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. Curi RMB makes no warranty or representation, express or implied, nor does Curi RMB accept any liability, with respect to the information and data set forth herein, and Curi RMB specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax, accounting, investment or other professional advice. Returns are presented net of fees. An investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not bear fees, taxes, or transaction costs. The investment strategy and types of securities held by the comparison index may be substantially different from the investment strategy and types of securities held by your account. RMB Asset Management is a division of Curi RMB Capital.
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