Colton Etherton
Colton Etherton

Article's Author

The Vanity Metric of Your Clients’ Finances

Do you track your clients’ net worth?

Do you track your net worth?

For a lot of people, this is how they gauge whether they’re doing well financially. Primarily because that’s how the financial services industry has trained people to answer the question – am I doing okay?

Side note – there are variations of this question that ultimately trying to get to the same point.  Am I on track? Have I been making good financial decisions? And so on.

I understand why this has been our primary metric. But I’d argue that it’s a vanity metric and at the end of the day it doesn’t actually tell us if someone is doing ok and if they’ll continue to do ok.

It’s the equivalent of saying someone with a 6 pack is healthy. They may look good but underneath those abs their body may be completely out of whack.

I’m going to continue with this health analogy for a bit so stick with me.

To be holistically healthy, you need to address both mental and physical health.

Just like there are multiple areas of the body that need to be healthy independently of each other and need to function properly together, there are many other areas that need to be working properly with your finances to truly be financially healthy.

I’m going to draw some comparisons then present a question for each area. These supporting questions will then help us answer our big question above – am I doing okay?

Mental health – the financial equivalent will be your financial purpose and goals. It will take understanding your money history and beliefs and answering the question – why is money important to you?

Diet – the financial equivalent will be your cash flow and how you use it. Whats coming in and where is it going between four categories – saving, spending, debt, and taxes. The big question here is – am I using my income wisely?

Just like everyone’s diet will vary based on their health goals, the way you use your income will vary based on your financial and life goals.

You’ve got your mind right. You’re managing your diet. Now it’s time to put your body to work. The way you build your body will depend on your exercise routine. Certain exercises will make sense for some people and not for others. Your assets are the same way. If you were training for a bodybuilding competition, you’re likely not going to be stacking miles on your Garmin. And if you plan to retire early, before 59 1/2, you shouldn’t be stacking all of your savings into a retirement account.

So our question here is – do I have the right mix of assets?

One important, but often neglected, area of health is rest and recovery. What’d the equivalent of rest and recovery for your finances? Managing your risk. The risk you take with your investments and risk you take with your insurance coverages.

When it comes to your investments, there’s often a sweet spot in how risky/aggressive you should be. You don’t want to take too much risk where the price fluctuations constantly stress you out, but you also don’t want to be so conservative that it’s negatively impacting the growth and delaying you reaching your goals.

As for your insurance, it’s important to properly protect yourself. Whats the point of building a seemingly healthy body if it’s fragile and prone to injury. The same goes for your money. What’s the point of working hard, using your income wisely, and building assets if you’re under insured and at risk of losing it all because of an accident, disability, or death?

Our question here is – am I taking the right amount of risk?

Finally we’ve come to the end. We’re in a good headspace, we’ve managed our financial diet and used that to build assets that align with our goals, and we’ve been diligent in protecting our hard work.

Now we can finally answer our question – am I doing okay?

But we aren’t just looking at your net worth. Remember, that 6 pack is only part of the equation. It won’t tell us the answer by itself.

Instead we’ll look at something called Total Term. Total Term looks at your net worth and divides it by your annual spending to see how long you could live off your net worth at your current lifestyle.

Now you may be wondering why I didn’t just start with this figure instead of covering everything else.

I’ll tell you why – Total Term doesn’t mean diddly if we haven’t also worked on everything else.

If we hadn’t discussed your goals and money beliefs, we wouldn’t know what the best way to use your income would be, or the right assets to use to get to those goals. It would’ve been a house of cards ready to fall.

Build Trust, Fast.

Reduce the time it takes to build trust with prospects and clients, so you can accelerate your business growth and keep clients happy.

Book a Demo

Schedule a time to see how Elements can help grow, scale, and modernize your planning business.

[formfuse id="1009"]