The following is a guest post by John Cortines, author of True Riches: What Jesus Really Said About Money and Your Heart. If you’d like to submit a guest post about financial peace or some other topic for Money Q&A, be sure to check out our guest posting guidelines.
We all want financial peace. It’s easy to think that financial peace comes from achieving our long-term goals, and then kicking back and fading into a pleasant sunset, sipping a margarita. Unfortunately, despite how popular this method of financial planning and thinking may be, it simply doesn’t represent how the human brain works and is thus a recipe for disappointment.
When someone asked John Rockefeller how much money was enough, he reputedly quipped, “Just a little bit more.” The book of Ecclesiastes from the Jewish scriptures teaches that “Whoever loves money never has enough; whoever loves wealth is never satisfied with their income.”
Therefore, we have a problem. Our goal-oriented wiring tells us that to get financial peace we should simply set goals and achieve them. But our innate human nature doesn’t cooperate. A recent study of wealth pointed out that people at every level of wealth believed that if they had roughly 25% more wealth, they’d be secure. In other words, as soon as you reach your goals, you just move the goalposts further out. What’s a person to do?
I believe if we begin to view our financial lives as more of a journey than a destination, we’re better positioned to experience true contentment and financial peace on the road trip of life. The three metrics below won’t tell you anything about your long-term financial goals and how to reach them – but they will reveal something important about the quality of your journey, at this moment.
Three Metrics for Financial Peace
And, these three metrics can be managed at every stage of life, no matter your income or wealth level.
Without further ado, let’s dive in on the three metrics:
Giving Rate
This one may be a surprise, but it’s at the top of the list. Numerous studies have linked meaningful financial generosity with happiness and health. Giving money away is really good for us.
Generosity may seem like an impediment to reaching your long-term financial goals, but it’s a critical aspect of your financial journey. I used to have a love-hate relationship with my charitable giving when I saw it as a competitor with saving more for retirement. But now, it’s a source of incredible joy, freedom, and purpose in my life.
When you give, you’re expressing your human agency to advance a cause you deeply believe in. That matters, and it makes every dollar you earn feel more meaningful. Giving creates a mindset of abundance rather than scarcity, which can dramatically alter whether or not we feel financial peace and contentment in our circumstances.
The calculation
Take your total charitable giving and divide it by your total gross income.
Example: Someone gives $5,000 per year on an income of $50,000 has a 10% giving rate.
Room to Grow: Giving under 5%
Better: Giving 5-10%
Best: Giving over 10%
Note: Giving is about so much more than just how much you give. The percentage doesn’t tell the full story. There are numerous issues of the heart that come into play, and we give much more detail in our new book.
Cash Flow Margin (or, Consumption Rate)
Cash Flow Margin measures how much money is left every month after you’ve paid your taxes, covered your living expenses, and completed your monthly giving. Margin is critical because, no matter how well we plan our lives and our spending, there are always surprises. Having an emergency fund is great, but being able to cover an emergency out of ongoing cash flow is even better.
Cash flow margin helps you build wealth over the long term, and is also how you rebuild liquidity after an emergency drains your accounts. It gives your budget some much-needed “breathing room.”
The Calculation
Take your monthly net income and subtract your monthly giving and typical monthly spending. Divide this amount by your monthly income to get a percentage total. Understanding your net worth can help you find financial peace.
Example: Someone has an income of $5,000 per month. In an average month, after taxes, ordinary living expenses, and baseline giving are taken care of, $500 is left over. $500 / $5,000 = 10% cash flow margin.
Room to Grow: <5% of monthly net income
Better: 5-10% of monthly net income
Best: 10%+ of monthly net income
Liquidity
It has been said that everybody is in crisis, coming out of a crisis, or about to enter one. And as the Boy Scouts say, “Be prepared.” Liquidity simply means readily available cash – money that you can easily tap into it and when you need it.
A recent study found that nearly half of Americans could not come up with $500 on one day’s notice and would have to borrow money to cover the deficit. A flat tire, a leaky roof, a surprise ER visit – any of these things can surprise us with a $500 or even $5,000 liability.
Most financial experts recommend keeping 3-6 months’ cash on hand, and I see no reason to disagree.
The Calculation
Take your total liquidity (available cash), and divide it by a typical months’ spending.
Example: Someone has $20,000 in liquidity, and spends $5,000 in a typical month. They have 4 months’ cash.
Room to Grow: Under 1 months’ cash.
Better: 1-3 months’ cash
Best: 4-6 months’ cash
I firmly believe these three metrics are strong indicators of your ongoing financial peace. They won’t tell you what your life goals should be financially, but they measure the quality of your journey. If you keep these three indicators in good health, your level of peace will be much higher than the average persons’.
Show me a person giving 10% of gross income away, with 10% monthly cash flow margin, who has 4+ months of liquidity, and I’ll show you a person who has a good deal of financial peace. Conversely, show me a person who is a non-giver, with no monthly cash flow margin and only $1,000 in liquidity, and I’ll show you a person likely to be worried about money.
Whatever your income or wealth, these three metrics are something you can work on improving, to better manage all that you’ve been entrusted with financially.
JOHN CORTINES is the author of True Riches: What Jesus Really Said About Money and Your Heart. He serves as Chief Operating Officer at Generous Giving, a Christian nonprofit that seeks to spread the biblical message of generosity. In addition to True Riches, John is the coauthor of God and Money and also speaks regularly at churches and conferences around the country. He earned his MBA at Harvard Business School and has two engineering degrees. John and his family of five live in Orlando, Florida.
If someone has no cash flow margin (I pay more than half my income to rent a room), how much are they realistically expected to give?