Unusual Metrics

First, I apologize for the lack of updates – the holidays have kept me busy!

If you track your personal finance numbers they can get a little bit stale. Typically people track monthly expenses and income. They can break these expenses down by category. These are very cool metrics if you were previously in the dark about your finances. They’re your bread-and-butter, meat-and-potatoes metrics. But there are other zesty, spicy metrics you can easily track. Essentially they’re just the output of a formula, but the meaning they convey is immense.

Daily Expenses

Tracking monthly expenses is fine, but suppose you like to travel? Typically people will not have consistent expenses for a month when traveling. It’s not normal to rent an apartment when you’re visiting another country (though it may be the rational thing to do)! Instead, the typical expense tends to be on a daily timeframe.

Let’s try a thought experiment: you always wanted to visit Thailand. The awesome cheap food, warm weather, exotic culture, ancient temples, rainforest and beaches had you daydreaming during office meetings.

The only problem? It costs $2000 to fly from the US to Thailand (this is just a rough number). Suppose you can pack up everything you own and leave it with friends or family for a while. This means you won’t pay rent at home. How long would you need to stay in Thailand to make up for the cost of the flight? Let’s say you assume that all your expenses will be a wash, except that lodging will be much cheaper for you.

You’ve put in all the effort to track your monthly stats. Take your average monthly expenses, multiply by 12, and divide by 365. Let’s say you live in Boston or NY, and share an apartment. You’d probably be spending about $1000 a month, or about $35/day. You do some research online and determine you can get a private room in a hostel on backpacking mecca Khao San Road for about $8/night.

Doing the math: 2000/(35-8)=74 days. In other words, lodging per night in Bangkok is so much cheaper than where you live now, you’d make up the intimidating cost of that flight in a little over two months. And that’s ignoring the cheap food and entertainment. Very cool!

ROI to Retire Today

When you start tracking everything, you can sometimes feel like you’ve got a long ways to go. To be honest, you probably do. It’s a journey you’ll have to embrace. But sometimes you want to daydream. you’ll think “how lucky do I have to be in order to retire today?”

While you’re unlikely to win the lottery, other things could happen that are at least a little remunerative. The magic formula here is:

Monthly expenses * 12 / Total Savings * 100

This will give you the percent you’d need to make to retire now.

Suppose you’ve been working for a few years and accumulated $50,000. You’re relatively frugal and spend $1000/month. In order to retire today, the formula says you’d need to earn 25% on your investments. That’s a lot, but it’s not unheard of. It might be possible to find a great rental property that gives you a 25% return. Or if you found a particularly volatile stock, you might make 25% in a year.

Each percent your required ROI goes, the more conceivable it becomes. Some REITs return 20% in dividends annually. Some MLPs will give you 12%. Or the market could easily have 3-4 big days in a week and end up 10%. Or maybe inflation could stay at 0 and you could earn 8% on safe corporate bonds.

Are any of these plausible? Well, not initially. But they’re not outside the realm of possibility. So they’re great for daydreams. They’ll help you stay optimistic as you approach the magic threshold of 3-4% ROI, generally considered sustainable.

So – numbers are useful. And some numbers you’d want to check every day. But each number is more than a metric, it also tells a story if you just listen to what it says.

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