The 7 FIRE Metrics That Matter: Part 3 — Cash Flow, Bare Necessities, & Cross-Over

Alright, we’re ready to start cooking now. The ingredients are coming together in this article.

We’ve covered 4 of the 7 FIRE Metrics That Matter in the last two articles:

• Net Worth (Total and Liquid)

• Savings Rate

• Withdrawal (and Replacement) Rate

• Return On Investment(s)

Now we’re ready to tackle the last three metrics. Let’s start with cash flow.

Cash Flow

Interestingly, cash flow was the last of these 7 Metrics I got my head around before leaving my corporate role.

It was always nagging at me, though. In the back of my mind, I was worried about it.

How am I going to pay for everything without a paycheck?

But I would shluff it off and just accept withdrawal rate as the answer.

As I approached the time to pull the lever and jump into a post-FIRE lifestyle, I finally saw the light.

I began to track cash flow from investments in 2017, for sure, and probably earlier.

Now, obviously, I was tracking my paycheck.

I was also tracking my company’s 401(k) match as “free” cash flow.

Plus, any moneys that came into my life, such as gifts, unexpected refunds, or such.

But I was fairly obtuse about what my invested assets were putting out in terms of cash.

Luckily, the two brokerage companies I use both have historical records, so I was able to go back and figure it out.

Essentially, my investments were putting off about 2.5% in dividends.

I had a fairly conservative 50/50 portfolio at the time.

Thus, I was getting a higher yield off my mutual funds than the S&P 500 put off at the time.

I own some shares of VOO, which is Vanguard’s S&P 500 ETF index.

It yields 1.04% currently.

One fund was yielding 3.5% at that time. I had two others that were yielding around 2% and 2.5%.

Thus, the 2.5% or slightly higher yield.

A smart thing I did the final year of my corporate work life (well, actually the year before the final year) was to set a spending budget that equaled or was close to a 3% withdrawal rate.

Thus, with a 2.5% dividend yield, it would only require a 0.5% withdrawal.

And, because I was in mutual funds, I was also getting Short-Term and Long-Term capital gains distributed. But, I don’t want to get into the argument and discussion of tax efficiency.

Clearly, ETFs in your individual brokerage accounts May save you from getting bumped up into a higher tax bracket.

Why? Because you control buying and selling.

You have zero control over the ST and LT distributions from your mutual funds.

The fund sets that based on turnover of assets.

However, the mutual funds were putting off over 6% per year in dividends, ST, and LT capital gains when I went back and checked.

So, I started directing this to my individual brokerage settlement account, and watched the cash reserves build.

Nice.

This has been a big part of the reason I have not had to sell assets to fund my annual spending budget since leaving my paycheck job.

So, it’s up to you to use either ETFs, Mutual Funds, or both (as I do now).

I am just saying that I am typically thankful for the cash flow from the mutual funds and not needing to make sell decisions like that on them.

The cash shows up, I pay the required tax (which has been zero a couple of years since post-FIRE), and I fund my spending budget for the next year.

Simple.

At some point, I may come back and discuss what are reasonable yields to expect from different types of investments.

However, you can almost always design a very safe portfolio that will generate 3% in cash-flowing dividends.

Thus, this is why 3% is considered “THE” safest of withdrawal rates.

The Bare Necessities

What I have termed the Bare Necessities metric is sometimes referred to as your “burn rate.”

Dave Ramsey refers to this as your “four walls.”

Others have referred to it as your “monthly nut.”

The idea is that if you were to stop all discretionary spending and only cover the “bare necessities” (thus the clever name of this metric, ha!), how much would that require of you each month?

• $1,000?

• $5,000?

• $10,000?

You really want to know this, and know it ASAP.

You can use this metric to set your emergency fund requirements, too.

For example, I had a 4–6 month emergency fund as I neared FIRE.

That was based on my average spending each month.

However, I knew that if I lost my paycheck, I would be able to stretch this fund out to 9–12 months by just going down to my bare necessity spending.

This is why you should also consider getting to and staying at ZERO debt.

I also don’t want to get into the argument about whether it is smart to pay off lower-interest debt or invest that money at a higher ROI.

That’s a moot point for this metric.

All this metric cares about is: What is your monthly requirement to pay for all your bare necessities?

Debt payments are only important unless you want to have your house and/or car repossessed, be hounded non-stop by creditors seeking payments, pay large penalty fees, perhaps even file bankruptcy, and have a credit score that will likely never recover.

If you want to avoid those things, and I recommend you do your best to avoid them, then Debt payments are indeed part of your monthly burn rate.

Which brings us to the final metric.

Cross-Over Point

How much capital do you need to have invested to fund your post-FIRE lifestyle?

When your investments reach this amount, you have hit the cross-over point.

Your paycheck shackles can come off and you are free to live a different life.

This is where the previous 7 FIRE metrics covered so far come together to give you the picture you need.

• Your Liquid Net Worth (unless you are able to cash flow your fixed and/or leveraged assets, too)

• Your “bare necessities” spending, plus “discretionary” spending budget

• Withdrawal Rate target … 3%, 4%, 5%, 8%? What will it be?

• Cash Flow … can you lower your required withdrawal rate by using cash flow?

• Savings Rate and ROI … how long from now will it take you to get to the amount of net worth that will fund that withdrawal rate?

Originally, I was shooting for $745,000 in liquid net worth. That was my cross-over Point.

I figured I could sell my house and move to a lower cost-of-living area.

But I had to reach it first, and I had been delusional about my progress.

This was how I began to see, in 2008 or so, that even taking my 401(k) to 25% would not get me to my desired exit date at age 48.

Projecting out my cross-over point showed me that even at this increased investment percentage, I would be working until 65 or later.

That got me moving.

People say “ignore” or don’t try to come up with your financial freedom number.

I call BS on that.

In my opinion, it is the compass point you need in order to know where you are on the path to your goal of FIRE.

Therefore, I can’t stress enough how important this last metric is in your journey to FIRE.

In the next article, I will discuss the fact that your cross-over point isn’t static.

It is more helpful to think of “cross-over points” … there is a continuum.