Skip the budget: Track your cash flow with just four numbers
Welcome to the second issue of Metrix that Matter, a weekly newsletter from WealthMetrix that helps you focus on what matters most for building and sustaining wealth. Every Saturday, we share an educational essay with actionable takeaways to guide you on your journey to financial independence.
Let’s go back in time for a minute, all the way back to your high school science classes.
In chemistry, you learned that matter can neither be created nor destroyed, it can only change form. In physics, you learned the same about energy. These conservation laws seemed to govern everything in the universe.
Well, turns out everything except for money. Wealth can certainly be created or destroyed. There’s a fundamental force in the financial universe that has a huge impact on your ability to build and sustain wealth: your cash flow.
Dollars can multiply through smart long-term decisions or can vanish entirely through poor short-term decisions. The same annual income can build a fortune for one family while leaving another in debt.
The difference isn’t how much money flows in, but instead what happens next.
Welcome to the world of incomes and outcomes.
The Four Possible Outcomes for Your Income
As promised in the title, I’m not going to ask you to complete a budget at the end of this newsletter. That is not where I prefer to start. Budgeting is a process of tracking hundreds of transactions, placing them in categories, and then attempting to set limits on how much you can spend. There are certainly tools out there to help you with this, but it’s a process that can quickly overwhelm you as you get caught in the weeds of monthly spending.
Instead, I start with a simpler process, one that only asks you to calculate four numbers, each one representing a broad category with a very specific purpose.
Every dollar that enters your bank account faces one of these four possible outcomes. Four paths that determine whether that dollar creates wealth or not. But unlike the unchangeable laws of science, you have some control over which path each dollar takes.
At the highest level, these are the four possible outcomes for your income:
Savings Rate: Building your future wealth
This is the percentage of income you're setting aside for your future self. Whether it's going into retirement accounts, college savings, or emergency funds, consistent savings fuel future wealth. You can’t have investments without savings first.
Burn Rate (Spending): Maintaining your current lifestyle
This is what it costs to live your current life. Housing, utilities, food, entertainment, subscriptions, all the money that flows out to maintain your lifestyle. This category can be very unpredictable at times, which is why I typically recommend figuring out this one last.
Debt Rate: Paying for your past decisions
These are the payments on money you've already spent. Mortgages, auto loans, student loans, credit cards. Each payment represents a past decision that's claiming a piece of today's income. Sometimes debt can be used to help build wealth (mortgage), but other times it’s a drain on your cash flow (credit card debt).
Tax Rate: Your required contribution to society
The portion that goes to federal, state, and local governments. It's non-negotiable but not unmanageable. Depending on your situation, you may be able to structure your income and savings to significantly impact this percentage.
Every dollar flows into one of these four buckets, which means these percentages should always total exactly 100%. How much money goes into each bucket reveals a lot about your current financial situation and where you're headed tomorrow.
These four metrics are also more interconnected than any other financial measurements. In fact, they're locked in a zero-sum game.
The Law of Cash Flow
Ready for another physics refresher? Remember Newton's third law of motion? For every action, there is an equal and opposite reaction.
Your cash flow follows the same principle. When one metric increases, another must decrease. It's an inescapable financial law that, once understood, changes how you think about every money decision.
Want to save more? Something must give to make that happen. You will either need to spend less on your current lifestyle or slow down your debt repayment plan.
Heading to the dealership to finance your next vehicle? Your current savings or spending will have to decline to accommodate for those debt payments.
Unfortunately, many people make big financial decisions without fully understanding how their cash flow will be affected first. This quickly leads to financial stress after you start feeling the pinch month after month.
On the other hand, you can use this financial law to your benefit. And you don't need dramatic changes. A 1% decrease in debt or spending to increase savings by the same amount can be a great start. It’s small enough to handle, but big enough to make a difference. Increase your savings by 1% per year and watch how fast your financial situation improves. In the world of cash flow, small actions create opposite, and often outsized, reactions.
Calculate your Cash Flow Reality
So, how do you figure out these four metrics without a budget?
First, you want to calculate savings, debt, and taxes. For most people, these are the easiest numbers to calculate because they are typically more consistent and predictable.
Then, add up those three numbers and estimate monthly spending with what’s left of your income.
Is it perfect? No. Is it more likely that you will complete this exercise rather than a budget? Absolutely.
Here’s the full process:
Step 1: Gather Your Numbers
You can use monthly or annual figures for each, just make sure you’re consistent with all categories:
Step 2: Calculate Savings, Debt, and Tax Rates
Savings Rate = (Savings ÷ Gross Income) × 100
Example: $20,000 saved ÷ $100,000 income = 20%
Debt Rate = (Debt Payments ÷ Gross Income) × 100
Example: $15,000 debt payments ÷ $100,000 income = 15%
Tax Rate = (Taxes ÷ Gross Income) × 100
Example: $22,000 taxes ÷ $100,000 income = 22%
Step 3: Calculate your Burn Rate (Spending)
Since spending is often the hardest to track precisely, we calculate it by subtraction. After you calculate the percentages for savings, debt, and taxes, add them all together and subtract from 100%. This is your estimated monthly or annual spending.
Burn Rate = 100% - (Savings + Debt + Taxes)
Example: 100% - 20% - 15% - 22% = 43%
Your Cash Flow Snapshot:
Step 4: The Reality Check
Look at all four percentages. Does anything surprise you? Does anything seem wildly off the mark? Having done this exercise numerous times with clients, it’s rare that anyone nails their cash flow on the first try, unless they already use a budgeting app. Below are some common miscalculations:
Progress over Precision
The key isn’t absolute precision. That is an unrealistic goal. Cash flow is rarely ever consistent, especially if you have lumpy income. These are all living, breathing numbers. They will constantly change throughout your life, as your career, family situation, and priorities change.
Instead, the key is to get a baseline number, something you can build on, something you can improve, something you can base decisions on. You will naturally get more accurate numbers over time as you pay more attention to your finances.
I will admit, tracking your cash flow isn’t the most fun process. But it is absolutely crucial. It is the starting point for so many different planning conversations, from understanding how much money you need to retire, to recommended cash reserves, to insurance coverage needs.
In the coming weeks, I will go into further detail on each of the individual metrics that make up your cash flow. While today was about calculating each number, future issues will be about setting healthy ranges, making improvements, and understanding planning considerations for each. I will also show you how important your spending is to each of the other 10 metrics I introduced last week.
Next’s week topic is a deep dive into the first individual metric, Savings Rate. If cash flow is the engine for your wealth, Savings Rate is the fuel. This, by far, is the most important metric for building wealth. You can’t have investments without savings first. Consistent savings over time beats any investment strategy.
WHAT TO FOCUS ON THIS WEEK
Calculate your four cash flow metrics using the exercise above. You can do this with a notepad, Excel spreadsheet, or by using the tool I use, Elements (invite below):
Do they add up to 100% of your income? If not, how far off are you?
Identify one specific action you could take to improve your weakest metric by 1%. Then set a reminder to recalculate these numbers in three months.
Thank you for reading. At the end of each newsletter, there is an invite to use Elements to see your financial scorecard. If you are ready to gain more clarity into your financial situation, we invite you to click the link below to get started with Elements. You will be asked basic financial questions about income, spending, debt, and account values. The process takes about 10 minutes. Once complete, we will review your scorecard and send you an email to schedule a 30-minute phone call to discuss your situation, answer any questions you have, and see if there’s a potential fit to work together. This whole process is complimentary.
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