Most people do not have a great way to monitor their finances and assess their financial health.
Tools like Mint and Personal Capital let you see all your accounts in one place and track your spending. This helps to some degree, but it falls short in answering key questions about your finances.
For example:
- Are you taking the right amount of risk?
- Are you using your income wisely?
- Do you have the right mix of assets?
- How much wealth do you need to make work optional?
The Elements Financial Monitoring SystemTM, delivered via mobile app, lets you easily measure and assess your financial health. We use the Elements Financial Monitoring SystemTM in our financial planning practice to help our clients make smart financial decisions.
What is Elements?
Elements is a set of financial indicators that provide a clear view of your financial health. These financial indicators create the Elements scorecard.
Think of the Elements scorecard like your vital signs. The Elements show us how you’re doing financially and where we should focus our effort to help you progress towards your goals.
The Elements are:
- Equity Rate
- Estate Status
- Insurance Rate
- Savings Rate
- Burn Rate
- Debt Rate
- Tax Rate
- Liquid Term
- Qualified Term
- Real Estate Term
- Business Term
- Total Term
This post gives a brief overview of each Element. We’ll dive into each Element in more detail in future posts.
Are you taking the right amount of risk?
These Elements indicate the risk levels within your investment portfolio, estate planning, and insurance profile. The amount of risk you should take in each area will depend on a number of factors including your tolerance for risk, career phase, liquidity, and financial goals.
Equity Rate shows how much risk you have in your portfolio. Knowing your Equity Rate helps you tell if your investments are too risky for your personal situation.
Estate Status helps determine how prepared you are to answer end-of-life financial questions.
Insurance Rate measures how much insurance you have compared to how much you need based on your annual spending and net worth.
Are you using your income wisely?
These Elements calculate the percentage of your income that goes towards savings (Savings Rate), spending (Burn Rate), debt (Debt Rate), and taxes (Tax Rate). These are the only four places your income can go. It’s important to optimize them to accelerate growth.
Savings Rate indicates how much of your income is being saved for future expenses, emergencies, and retirement. It’s also an indicator of your overall financial security.
Burn Rate indicates how much of your income is used for living expenses. It helps you understand your spending patterns and retirement preparedness.
Debt Rate indicates whether you are servicing too much debt for your individual circumstances.
Tax Rate helps you determine if your tax liability could be reduced with better tax planning.
Do you have the right mix of assets?
These Elements provide a clear view of your asset distribution (Business Term is a bonus Element for business owners). When added together, they create your Total Term. They help you understand if you have the right mix of assets for your goals.
Liquid Term estimates the number of years you could live on cash or cash-like assets outside of retirement plans. It also indicates the amount of non-retirement money you could access if needed.
Qualified Term estimates the number of years you could live on the assets you have within qualified retirement plans.
Real Estate Term estimates the number of years you could live on your current real estate equity. It also indicates how much of your wealth is concentrated in real estate.
Business Term estimates the number of years you could live on your current business equity. It also indicates how much of your wealth is concentrated in the business.
How much wealth do you need to make work optional?
Total Term indicates how long you could live on your current wealth if it did not grow. It provides a conservative estimate of how many years you could survive if you stopped working today. It is the summation of the four Elements that represent each asset type: Liquid Term, Qualified Term, Real Estate Term, and Business Term.
Do you know the answer to questions like:
- Are you taking the right amount of risk?
- Are you using your income wisely?
- Do you have the right mix of assets?
- How much wealth do you need to make work optional?
A financial advisor who uses the Elements Financial Monitoring SystemTM can help answer those questions. We offer a free assessment to see if you’re on track. Download the Elements app and populate your personal Elements scorecard. Then an advisor from our team will reach out to schedule a free call to review your scorecard and answer your financial questions.
