How Old Is Your Money?
There’s no one metric to rule them all. No financial number gives you a complete picture of your financial stability, flexibility, or security. Your car’s gas gauge won’t tell you everything about driving your car.
Any metric, if you push on it long enough, starts to show some strain.
Net Worth. Does a high net worth give you flexibility? What if it’s all tied up in real estate and the market tanks? Security? What if you’re underinsured or overexposed to liability? Stability? Do you know your expenses won’t change?
Income. You already know this one. Does a big income mean you’re more stable, flexible, or secure? Nope. Spend it all, or more than you’re earning even, and you’re in a world of hurt. What if you lose your job tomorrow? Even if you’ve been living within your means, income doesn’t necessarily equate to stability, security, and flexibility.
Savings Rate. This one, in my mind, is probably the closest to a magical single metric. It’s a function of living within your means, which does show a bit of security and flexibility. It even gives some stability with that stashed cash. But what if your income is anemic? Or your investments aren’t diversified? Or they’re ravaged by inflation?
Burn Rate. This one’s interesting! You see it in the startup world quite a bit. “How long will it take us to burn through this much cash?” At first glance, this looks pretty good. “How long will my money last?” And if you can answer that it will last a year, well, that’s better than the guy that looks at you with panic in his eyes and squeaks out, “Tomorrow!” But wait, do you know how long that money will last? Absolutely not. Burn rate is a real close cousin of forecasting, because you have to rely on averages, probabilities, and some reasonable assumptions, but you still do not know. You’re still just throwing out reasonable guesses.
And now we’ve just introduced a brand new metric…
Age of Money
Sometimes it’s helpful to explain what something isn’t in order to explain what it is. So, here goes:
Age of Money is not your burn rate. It doesn’t tell you how long your money would last given the same historic spending patterns. It doesn’t tell you how much money you have (net worth). It doesn’t tell you if you’re about to spend your last dollar (account balances do). It doesn’t tell you if you’re properly diversified in your investments, whether your savings rate is appropriate, or whether you should really spend that much on organic fill-in-the-blanks (I don’t want to offend people that buy those, after all…). It doesn’t tell you if you’re increasing your debt (your credit card balance), or whether you should eat out tonight (your restaurant category).
If you push on Age of Money to do any (or all!) of those things it will break down. Just like any other metric.
Age of Money tells you, on average, how many days you let your dollars sit before having them do the jobs they’re assigned. That is all.
And dollars that sit are better than dollars that don’t. If the last dollar you spent came from a paycheck six weeks ago, that’s better than the last dollar you spent being from yesterday’s paycheck—that’s what Age of Money describes.
Like Net Worth, Savings Rate, and Burn Rate (“You’ve saved this much, at this rate, which historically would have lasted you this long”), Age of Money is reporting the past. Not the future.
Different visualizations around Age of Money will be interesting. For now, we have that one number at the top right of the screen. It’ll go up. It’ll go down. The fact that it’s averaged kind of softens its swings.
In the end, you’ll want to know this:
- If you never or rarely use credit cards, you’ll want to see the Age of Money stay above 30. Aging your money out to stay above 30 days makes everything so much easier. Your budgeting can be done less frequently, you can set up your bills on autopay (no timing paychecks to bills!), and your stress level will drop.
- If you use credit cards for most of your purchases and you pay them off monthly, and you’re NOT just budgeting a credit card payment for all the stuff you bought last month (what we call riding the float), you’ll want to keep your Age of Money above 60. This reflects the fact that you’re letting cash sit longer because you’re borrowing.
Rule Four: Age Your Money
Let it sit. If you’re done budgeting for the month and you have extra funds, budget some to the next month until that ‘To be Budgeted’ is at zero. The next time you sit down to budget, repeat the process.
Send those dollars to the next month, whatever you can. In short order you’ll realize that you just funded all of February and it’s the middle of January. You’ll sit there befuddled. “Did I do something wrong? Am I missing something?” (You may have missed Valentine’s Day. Go back and adjust.)
But no, you didn’t miss anything. You’ve just let some money sit. Where it’s waiting on you, instead of the other way around.