By Dr. Joshua White, WCI ColumnistOne of my favorite quotes from The White Coat Investor blog and podcast is when Dr. Jim Dahle talks about the three forms of currency in our lives: money, time, and physical health. Reflecting on where you are in each of these areas will help you identify what you need to change to be more in alignment with your intentional desires.
In this column, I suggest simple questions to conduct a specific financial health audit to find out where you stand.
What Is Your Net Worth?
Here's how to calculate your net worth: Assets – Liabilities = Net Worth.
It's a simple calculation, but I have noticed that determining my net worth and celebrating progress really helps increase my motivation to improve my behavior. I do this every time I get paid monthly. It only takes me a couple of minutes, and it's a good idea to do regularly.
How is your net worth trending each year? It should be progressively increasing at a faster rate, given the steadily increasing interest.
Savings + ROI + Debt Paid Off = Net Worth Increase per year.
With the table and graph below, you can see that assuming an unchanging deposit of $80,000 per year for five years with an assumed growth rate of 5% real, the rate of growth will steadily increase. In Year 1, there is an $80,000 increase in your net worth. By Year 5, your net worth is increasing $102,102.53 per year, even though the yearly investment is unchanged. That is because each year you are getting your investment plus interest on the whole sum.
Continuing the projection for a total of 30 years, your net worth in Year 30 will increase by $345,755 for a total net worth of $5.5 million. Calculating your net worth will help you check your progress and make sure you are on track.
What Is Your Savings Rate?
Here's how to calculate your savings rate: Total Year Savings/Yearly Gross Income = Savings Rate.
Say that a physician makes $400,000 in gross income in one year and saves $80,000. That's 80000/400000 = 20%. The recommended savings rate for high-income professionals is around 20%, although this really depends on your income, desired spending in retirement, and other financial goals.
Recently, I ran calculations of my total savings rate for the last few years, and it wasn’t as high as I thought. I had to make some changes to get back on track to a savings rate of above 20%. If your savings rate isn’t where you want it to be, what can you do to get it back on track? What are you willing to sacrifice? What is the trend of your savings rate over the last 3-5 years?
The above projections are based on a steady investment of $80,000 per year. What if you could save more each year in comparison to the previous year? Progress is the goal, so how are you trending? Is your savings rate increasing, decreasing, or staying the same? I have a goal to shift my lifestyle creep to investment creep.
More information here:
A High Savings Rate Covers a Multitude of Sins
Saving for Your Future Stranger
Predicted Time to Financial Independence
This can be a helpful calculation, so you can see what you need to do to get the financial freedom you want and how fast you want to do it. Obviously, this is multifactorial, and we all have different circumstances and priorities.
Step #1
What is your desired amount of income per year in today's dollars? Let’s assume for this projection that it's $150,000 per year.
Step #2
Multiply this number by 25. That equals the number with which you will achieve financial independence in today’s dollars ($150,000 x 25 = $3.75 million). This is assuming that the 4% rule is a safe number for withdrawal in retirement.
Step #3
Use a retirement calculator such as this one to run projections for your future. These projections assume a 5% real gain per year (8% average gain – 3% inflation). These scenarios are meant to help you think about what your goals are and what changes you want to make. I encourage you to experiment with these calculators and assumptions based on your individual circumstances. It's fun and, more importantly, very motivating!
- Projection 1: If you have no starting investment and you contribute $80,000 per year, you will reach your goal of $3.75 million at just over 24 years. At 30 years, you will reach just over $5.5 million in today’s dollars.
- Projection 2: If you have no starting investment and you contribute $100,000 per year, you will reach your goal of $3.75 million at 21 years. After 30 years, you will reach just under $7 million in today’s dollars.
- Projection 3: If you have no starting investment and you contribute $120,000 per year, you will reach your goal of $3.75 million partway through year 18. In 30 years, you will reach over $8.3 million in today’s dollars.
- Projection 4: No starting investment, and you contribute $34,000 per year (imagine maxing out one employee 401(k), a Roth IRA, and an HSA. At 30 years, you would have $2.37 million, and you wouldn’t reach your goal until around 37.5 years.
- Projection 5: If you have $1 million invested and don’t contribute any more, it will take 27 years to reach $3.75 million, the original goal amount.
Where Are You in Your Progress Toward FI?
And where will you be next year?
This can be an interesting calculation to track your progress. Although progress may average out for significant growth each year if allowed to grow for 25-30 years, growth is likely to be volatile from year to year.
Net Worth/FI Number in Future Dollars = % Progress Toward FI
Assume the original assumption of $80,000 per year with financial independence in 24 years with a projected amount of $3.75 million (in today's dollars, that's assuming 5% real growth, equivalent to $5.77 million in future dollars).
If you have $200,000 in net worth, divide that by $5.77 million to get your progress toward FI (200,000/5,770,000 = 3.5% progress toward FI).
Are You Adequately Insured/Prepared for Catastrophe?
I frequently see patients in the emergency department who are concerned about GI bleeding. We know that getting a colonoscopy at the recommended time helps reduce the risk of dying from colon cancer. But are you doing what you can to reduce financial risks?
- Life insurance: If you or your spouse unexpectedly died, would your life insurance give you enough to be financially independent? If not, how big of a gap would there be?
- Disability insurance: How much income would disability insurance pay you per month if you got disabled? Would you have enough to pay expenses and save for the future? If not, are you eligible to apply for more? If so, I recommend doing so.
- Emergency fund: If you suddenly lost your job or suffered a severe accident, how many months of expenses do you have saved up? Is it quickly accessible? If you are not financially independent, it is recommended you have 3-6 months of expenses in an emergency fund.
More information here:
No Coffin, No Problem: A True Life Insurance Payout Story Where Death Wasn’t Required
Are You Using Your Wealth to Improve Your Physical Health?
Although this isn’t specifically financial health, the worth of your wealth is significantly diminished without physical health. What are you doing to use your wealth to improve your physical health? Would a home gym help you reach your physical goals? Or just a gym pass? A personal trainer? A dietitian? A meal prep service?
A true measure of financial health is to improve other important areas of your life. I have found that occasionally spending more money to help me achieve my physical health goals, such as hiring a trainer, can make a big difference in my ability to make the changes I want.
Are You Using Your Wealth to Strengthen Your Relationships with Experiences?
The greatest uses of your wealth should include spending time to strengthen your relationships. The most valuable reward you can get from your efforts is love and proximity. If that is so, what are you doing to improve your relationships? In an era where the surgeon general has declared loneliness an epidemic, you and I need this more than ever. Marriage researcher John Gottman recommends taking six hours a week to better a relationship, including weekly date night.
Just like you shouldn’t time the market financially, are you making an effort to regularly invest in your most important relationships? What are you doing to cultivate friendships? Consider creating traditions that encourage experiences to strengthen your relationships. Some ideas might include: regular family reunions, doing an international trip once a year, taking cruises with family and friends, joining a sports league, etc. If you audited your time, how much time are you spending trying to improve your marriage every week? What about your friendships or family relationships?
More information here:
The Importance of Real Partners
When Finance and Relationships Intersect
Are You Able to Give Your Money and Time?
Happiness researcher and Harvard professor Author Brooks frequently speaks about how giving money and time has been shown to improve your overall happiness and your overall wealth. How much money and time are you giving every year? Does your happiness and wealth deserve a boost? Consider ways you can give more.
Does Your Financial Behavior Align with Your Goals and Professed Priorities?
Now that you have had the opportunity to collect individual qualitative and quantitative data about your financial health, how do you think you are doing? Does your behavior align with your intentional priorities, or are you experiencing some behavioral dissonance?
Here's my personal example. After conducting a personal financial audit, I realized that my savings rate wasn’t as close to 20% as I thought. I was spending too much money on the house I bought and trying to aggressively pay off my student loans. I realized that I was struggling to achieve some of my health goals, and I also wanted to spend more effort to strengthen my relationships. As a result of this audit, I decided to put my house up for sale and move into a rental, which cut down my expenses significantly.
By just switching my housing arrangement, this amounted to saving around $2,200 more a month. I also increased my savings rate and made it more automatic, and I booked a trip I have been wanting to do with my family. This exercise was helpful for me, and I hope it will be for you as well. I recommend adjusting this to your needs, adding or taking away questions if you'd like. I recommend doing a financial behavior audit at least once per year to gather data so you know where you stand.
Here is a sample financial health questionnaire to quantify your financial health. Of course, this is not all-inclusive, but it's an example of what quantifying your financial health might look like.
More information here:
Sample Financial Health Questionnaire
Tally your total points and multiply by two = /100
What is your net worth?
- $5 million or more (5)
- $2.5 million-$5 million (4)
- $1 million-$2.5 million (3)
- 0-$1 million (2)
- Below $0 (1)
How is your net worth weighted when compared to your spending?
- 25 or more times yearly expenses (5)
- 15-25 times yearly expenses (4)
- 5-10 times yearly expenses (3)
- 1-4 times yearly expenses (2)
- Less than one year of expenses (1)
What is your savings rate?
- Over 20%/or financially independent (5)
- 15%-20% (4)
- 10%-15% (3)
- 5%-10% (2)
- 0%-5% (1)
- Spending more than saving (0)
How many years to financial independence?
- Achieved FI (5)
- 1-5 (4)
- 5-10 (3)
- 10-15 (2)
- 20-25 (1)
- 25+ (0)
How much consumer debt do you have (not including student loans or mortgage debt)?
- $0 (5)
- $1-$10,000 (4)
- $10,000-$20,000 (3)
- $20,000-$30,000 (2)
- $30,000+ (1)
Do you have adequate insurance?
- More than adequate or financially independent (5)
- Adequate (4)
- Slightly less than adequate (3)
- A lot less than adequate (2)
- No insurance (1)
Emergency fund?
- Six months or financially independent (5)
- 3-6 months (4)
- 2-3 months (3)
- 1-2 months (2)
- Less than one month (1)
- Nothing (0)
What percentage of your income or time do you donate?
- 15%+ (5)
- 10%-15% (4)
- 5%-10% (3)
- 0%-5% (2)
- 0 (1)
Mortgage balance?
- Paid off (5)
- Less than $100,000 (4)
- $100,000-$200,000 (3)
- $200,000-$300,000 (2)
- $400,000-$500,000 (1)
- $500,000+ (0)
How satisfied are you with your financial behavior, especially as it relates to your health and relationships?
- Very satisfied (5)
- Satisfied (4)
- Neither (3)
- Dissatisfied (2)
- Very dissatisfied (1)
Suggested points results:
- 80-100: Excellent financial health, likely financially independent or close
- 60-80: Good financial health, some areas of improvement available
- 40-60: Fair financial health, many areas of improvement available
- 12-40: Poor financial health, financial health needs immediate attention.
How is your financial health? What did you score on the quiz? Have you ever done a financial health audit? Is that something that could help you?
Great summary and metric check.
One thing: savings rate — would be more specific: RETIREMENT savings rate of 20%
People have a tendency to count other savings: house, car, college, wedding as part of the savings rate calculations — those don’t support retirement calculations
I agree. When I’m talking casually about savings rate or my 20% rule of thumb, I’m definitely only counting money going toward retirement. But personal finance is personal. Count whatever you want. Just be consistent and make sure you’re on track to reach your own goals.
Great point. Savings rate specifically relates to retirement savings. It would be easy to get a false sense of security saving up for cars, vacations, etc and counting that as a wealth building activity.
Do you count mortgage pay off as part of your savings rate?
I don’t. If you want, count it both ways.
I don’t either. I think the more expensive your mortgage is, the more inaccurate this could be. If I was going to count it I would only use the number of amount of equity gained per year, as this is the only real wealth building activity.
If I were going to count extra mortgage payments (and I don’t because I only count money going toward retirement) I would only count EXTRA payments, not the regular payments (even the part going to principal).
I took out a mortage that just under 1.5x my salary.
I’ve been putting 30-50% of my take home as extra payments toward it each month (usually closer to 30%).
might not be the “optimal thing” (vs putting that money into a 401k and FSKAX/FXAIX)
I Guess I get why people wouldnt really consider that savings, If I’d bought a house that was 75% of my yearly I’d be in a better financial position . And certainly if I’m “saving” to buy a 60 k car vs a 20k one I’m not really “saving”
But I’m fairly confident in my current financial plan which should have the house paid off in ~5 years even if I’m not optimizing returns and taxes
If you’re putting 30-50% of your tax home pay anywhere you’re likely to crush all of your financial goals. Where it goes is far less important than how much of it is going there.
Since i don’t have a mortgage (can’t afford to buy in my area), I’d like to propose an alternate question: how much BTC do you have?
zero – 0 pts
<0.1 – 1 pt
0.1-0.25 – 2 pts
0.25-0.5 – 3 pts
0.5-1.0 – 4 pts ***
1.0 BTC – 5 pts
I think this brings up a good point. I include things I value and applies to my situation but everyone is different. This should be adapted to your personal financial goals.
I appreciate the math throughout this article thank you!
Speaking of which … savings rate is a really basic one but in this article (and many others that talk about savings rate) you talk about calculating it by considering gross income, but for savings you don’t say gross or net. I know it can get complex but is there any guidance? 401k pre-tax vs mega Backdoor Roth vs taxable vs HSA are all extremely different. Not to mention whether they’re invested with capital gains taxes exposure or income tax or ..
If it goes in your 401(k), HSA or taxable, count it.
Thanks. Interesting that this means considering them all equally (regardless of tax advantage) when clearly they aren’t.
And would Backdoor and mega Backdoor Roth not count in the equation anywhere?
(maybe you’re counting MBDR as 401k, so you maybe already covered that)
If you wanted to find the exact equivalent amount for pretax vs post tax that could be done of course, but in my mind save at least 20 percent and everything counts that builds your retirement fund. Roth, megabackdoor, 401k, hsa, etc.
I would count both as retirement savings yes.
RJ, great insight!
I would say as a rule of thumb 20 percent is a good goal regardless of pre tax or post tax. I think most people aren’t saving near enough so this idea lifts the vision of how much we need to save. I’m speaking from personal experience. Obviously 20 percent pretax is lower than 20 percent post tax, but this is rule is just a rule of thumb and everyone should adjust based on their personal financial goals.
It’s hard for me to reason about how it can be a good goal either way.
Take the example from the article:
“ Say that a physician makes $400,000 in gross income in one year and saves $80,000.”
20% of pretax income would be $80K, 20% of post tax would be closer to $50K
So the savings rate is radically different depending on which one you use.
The way I think about it is at least 20 percent of pretax income. Thats a good rule of thumb but I think everyone should do their own personal calculations because it is a complicated question to find the equivalent post tax number and whether post or pre tax would be better. I’d say if the rule of thumb works for you great, if not just don’t worry about it. Not my rule but I’ve found it to be really helpful for me
Great article. Like always. How do you factor in a work pension which I plan to take as a monthly benefit vs lump sum.
Thank you! Great question!
If I was doing this I would probably take the monthly pension amount multiply it by 12 and then subtract that amount from your total yearly desired income in retirement. Although I have to admit I don’t know enough about your pension: does this increase with inflation, etc? Hope this helps!
Josh dude nice article man! I scored a 58- man I suck! A $850,000 mortgage and not donating really killed my score :(. It is a nice rule of thumb score you have though 🙂
Thanks Rikki!
Obviously this suggested score is very flawed. I think you make a great point about some questions being more important than others. If you are happy, have a good savings rate and a good net worth, it matters a lot less if you have an expensive mortgage. What do you think is the best way to measure how house debt affects your financial health?
Dude Josh fantastic question! I think it really doesn’t matter how much overall debt you have just that you are able to live your life and pay for things that make you happy and able to save 20% of gross income for retirement. Maybe the question should’ve been“how much are you paying towards your debt while saving and spending” and maybe get five points for “able to pay debt off early and saving 20% towards gross income and able to buy everything that makes you happy,” four points for able to service your debt and save 20% for gross income for retirement but compromising purchases that make you happy, 3points not saving 20% of gross income and compromising on things that make you happy in order to service debt, 2 points not making significant progress towards debt and not saving 20% towards and not spending to make happy, and maybe -5 points for “I keep spending and I’m going into more debt, including credit card debt and I’m spending frivolously just to get a quick dopamine hit and not spending for true happiness. “
Rikki I like that a lot. As it stands this doesn’t address several scenarios like having a lot of leverage for income properties and having an inexpensive house but a higher income. I like that your suggested edit factors in trajectory more than present calculations. I think trajectory matters more in terms of financial health. Love the insight