There are certain questions in life that we end up asking ourselves at some point or another like “why doesn’t she like me?” or “I wonder if this food is still good?”. These are both valid questions but they pale in comparison to more important questions, many of which relate to your finances. In fact, there is one question that 99% of people never ask themselves which can literally change their financial life forever and in a minute I will share what that question is and just how powerful it can be!
I hate to admit it but most people are simply asking the wrong questions when it comes to their finances. For instance, people will ask themselves how many Starbucks coffees they need to cut out a month to finally start saving money or how many hours of overtime they need to work this year in order to have a shot at a 2% raise. Little do they realize that neither of these questions will ever move the needle financially even if you are able to answer them properly.
In fact, in my experience, those that get the furthest ahead financially are the ones who ask themselves the tougher, more lofty questions because even if they can’t solve them right away, they put themselves on track for much greater financial success. For instance, asking yourself how you can double your income in the next year and working towards it will take you much further ahead than asking how you can convince your employer to give you a 3% raise. In short, good questions lead to good answers.
Now that you better understand the importance of asking good financial questions, let me share with you the most important money question no one asks themselves. That question is:
“How far can the money I presently have take me?”
I like to call the sum of money that answers this question your financial runway because it truly is the extent to which financial safety ends and financial problems begin.
Like I said earlier, just about no one asks themselves this question and if you ask me this is the case for a few reasons.
Just Ask, Right?
The first reason people fail to ask themselves this critical financial question is because they already know the answer and trust me if you already know the answer then this is typically not a good thing — here’s why. If you know that calculating your financial runway is a futile exercise then that typically means that you know that you have no financial runway to begin with. For example, you may be someone who is drowning in student debt and know you won’t have your net worth in the positive for many years to come. Alternatively, you may already be aware that your savings habits have yet to mature and those specks of dust sitting in your savings account are all you have to show for your years of work. This is by far the least desirable situation to be in and if this is you then you definitely have some work to do.
Next, we have those who don’t know how to calculate their financial runway. If you’re someone who’s financially savvy then it’s hard to imagine that many people go through life without a budget or even any real sense of where their finances stand. Yet, more people than you probably think are in this exact position and just hope and pray every month that whatever they spend can be managed between what savings they have and the room left on credit.
Fortunately, for those who have yet to perform this important financial exercise, I can sum up how to calculate your financial runway in two easy steps. The first step is to take the average amount of money you’ve spent over the last three months. This will give you a ballpark idea of how much you regularly spend. Then, divide this number into the dollar value of the assets you own which would include your things like your home, your investment portfolio and your cash. In short, if you liquidated all of your assets, how long could you live at your current rate of spending?
Finally, we have the group of people who have yet to answer this vital financial question simply because they have yet to understand just how important it truly is. If you ask me, this question is equivalent to asking yourself how your current poor eating habits will affect you down the road or if your partner’s terrible money habits are something you think will cause bigger problems in the future. Most of us avoid hard questions in life because they force us to face our problems but running out of money is a problem I think we’d all agree is worth tackling before it ever happens.
In fact, regardless of how uncomfortable asking this question can be, I think that the merits of doing so are threefold and far outweigh the momentary sense of uncomfortability it gives most people.
For starters, asking what your financial runway is gives you a great opportunity to assess your current financial health. For instance, if you go through this exercise and realize that you could only survive for three months without any income then clearly you either need to tamper down your spending or re-assess how effective your saving habits really are. Taking this one step further, if you realize that your financial runway isn’t as long as you’d like it to be, this gives you a great opportunity to think of ways to extend it. For example, you may come to appreciate further just how punishing having credit card debt is and work extra hard to pay it off. Alternatively, you may grow more frustrated with your current job’s compensation structure and start using your free time after work to start a profitable side hustle.
The next benefit you receive when asking this tough financial question is understanding how financially flexible you are. I hate stretching at the gym as much as the next guy but there’s no doubting the fact that being flexible has its merits. For instance, if you calculate your financial runway and realize you can go two years without an income then it may just be the insight you need to pursue that second career or go back to school.
I know for myself personally, knowing that I have numerous years of financial runway gives me an incredible sense of financial power. For me, it means that if I truly don’t want to work the job I presently have, I can comfortably quit and take my time finding one that would be more suitable. Not to mention, having this cushion is a testament to the effectiveness of the financial decisions I’ve made in the past. Typically, the longer financial runway you have, the better financial decisions you’ve made to date and this is not only something you need to realize but commend yourself for too.
Finally, your financial runway is a key tool in your overall retirement planning process. Let’s face it, most of us don’t like our jobs and even if we do, we know that we don’t want to work forever and fortunately, understanding your financial runway gives you a sneak peek into how far down the line retirement will be for you.
For instance, if you do this calculation and come to realize that based on your current level of expenses you have a 5 year financial runway, it will then prompt you to ask another important question which is “how do I extend my financial runway so I never have to work again?”. The reality is that once you get to an answer where your runway extends beyond your remaining number of years on Earth, you may be able to retire.
Now, speaking of extending your financial runway so that you can stress less, be happier and not wait 50 years to slam down your two-week’s notice on your boss’ desk, let’s briefly go over which two factors are the most important when maximizing the current state of your financial runway.
By far and away, the most important factor when it comes to how far your money can take you is how much you spend. In fact, I would bet my $20 weekly allowance from my mom that if you did this calculation and realized that you have no financial runway or that it’s much shorter than you’d like that it’s a direct result of your overspending habits. Here’s a quick example to illustrate just how punishing spending is on your financial runway.
Let’s say you have a financial runway of $100,000. If you spend a moderate $4,000 a month in expenses, you can literally keep yourself afloat without an income for over 2 years.
Alternatively, if your monthly outflow is $6,000 due to lifestyle inflation and ever increasing interest payments, you all of a sudden cut down your runway by roughly 30% or 9 months. Put another way, your level of spending equates to how fast your plane moves down the runway. The faster it moves, the shorter amount of time it will remain on the runway.
Moving on, the second most important factor in our financial runway equation is your income. In this context, your income is equivalent to the cement you have to extend your runway. The more money you make, and more importantly keep, the more you can use to extend your runway.
In an ideal world, you would be moving down your financial runway at the slowest speed possible while having the longest runway you can.
Now, if after you answer this critical financial question you realize that your financial runway is about as short as the texts girls send you then here are two steps I recommend you take.
How To Win
First, seek out big wins when it comes to saving money. Most people make the mistake of thinking all savings efforts are equal but they aren’t. That’s like saying that running a marathon is equivalent to walking a lap around your block. Sure, they are both forms of cardio but one is definitely more beneficial than the other.
Simply put, minor savings will result in minor additions to your financial runway. Cutting out your daily Starbucks coffee will only add a few extra feet to your runway whereas modifying your living arrangements could have you adding yards of runway instead. To point you in the right direction, you can never go wrong when trying to save more money by focusing on your big 3 expenses of housing, transportation and food. These three costs alone typically make up 70% of someone’s budget so they are the areas that offer the biggest opportunities for saving.
After you’ve gotten your savings dialed in then you need to start leveling up your income. Let’s face it, your plane can’t remain idle. Put another way, this means that you will always have some expenses to cover which means extending your runway through income expansion.
When it comes to making more money, I typically recommend people do two things. First, aim to maximize the current income you’re making at your job. Chances are right now you have some wiggle room to negotiate a raise at work and if you’re going to be trading 8 hours a day at your job then you may as well get paid the most you can for that time.
The second thing you’re going to want to do is aim to create one new stream of income outside your job. I think that just about anyone can successfully start earning a few thousands dollars extra per month within half a year’s time and when you realize how much this will extend your runway, trust me you won’t lack any motivation.
For instance, if you currently live off $4,000 a month, making an extra $2,000 a month would buy you 6 months of extra runway. Not to mention, if you invested that extra money instead of just saving it, then your runway would build out even faster and ultimately make retirement that much closer.
Therefore, ask yourself the tough questions, create smart solutions and soon you will have more than enough runway as you travel through the rest of your life!