Have you thought of how long can you sustain without working? Life events always kick in and change our financial direction.
Financial runway tells your period of sustainability in case of no income sources from working. The same concept can be used for running business to keep business solvent.
You might stop working by choice or by chance.
Retrenchment or downsizing of company could happen with slow down of economy. Pregnancy and decision to spend more time with family could be contributing factor for stop working as well.
Therefore, it is crucial to know your financial runway before you get into trouble.
Adequate financial runway length allows you more ample time to re-strategize your direction. You are most probably to make a rough landing if you are at the end of your runway.
How do you determine your financial runway?
Assuming that you have zero income when you do not work.
Step 1: Look Into Your Saving + Liquid Investment Assets
You need to know how much do you have in your saving and investment. You can liquidate your investment assets when necessary.
It’s recommended investment assets that can easily change into money. In another word, the assets should be liquid.
Why must your asset be liquid?
You don’t reap the best financial gain when you sell off your assets in rush. Due to emergency, you will probably lose bargaining and negotiation power in maximizing your return.
Step 2: Determine Your Monthly Expenses
List down all the expenses.
Fixed expenses: mortgage, car loan repayment, insurance bills, utility bills
Variable expenses: food & beverage, grocery, tolls, petrol, baby food, diapers,
Take into consideration on which expenses can be reduced, and which need to be increased.
If you are pregnant, and would like to stop working after baby delivery, your petrol and toll expenses can be reduced while expenses on diapers, breast feeding tools and baby foods need to increase.
If you are calculating your runway for survival after retrenchment, transportation costs can be decreased, while medical cost should be increased if you have been relying on company medical benefits.
Step 3: Digest Your Numbers
Now, it’s time crunch your number and complete your financial runway puzzle!
Your Saving + Liquid Assets = RM 50,000
Your Monthly Expenses = RM 5,000
It means that you can sustain for 10 months without working (by choice/ by chance).
When you are close to 10th month of your financial runway, it is time for you to worry!
Need help in any calculating your financial runway? Leave me a comment.
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