Businesses pay close attention to Key Performance Indicators. Also known as KPIs. They help the business owner how well or not well the business is doing. Cash Flow reports help them to see if they have enough money to pay their vendors. The Balance Sheet allows them to compare their assets vs. liabilities. And most importantly, their Profit and loss statement shows if their business is making money. Or not.
Key Performance Indicators allow business owners to best understand their business. In the same way, I believe similar KPIs can help us best understand our personal finances, and most importantly, enable us to make the best financial decisions. Peter Drucker is famous for saying “What gets measured gets managed”
When we know what our savings rate is, we can determine if we want to throttle that number up. Or slow it down because you can’t stand eating beans and rice every night. Or if you have outstanding debt you want to pay off. Having a clear understanding of the amount outstanding can allow you to track your progress.
When my wife and I were paying down our $105,000 of student loans, I had a very detailed excel sheet where I would show how much we owed in relation to how much we paid down each month. Seeing the percentage of debt remaining go down from 75% to 74%, as I have to admit, is quite motivating. So in this article, I want to review 5 personal KPIs you can track regularly to help you reach your financial goals.
1 Net Worth
At a high level, your net worth is calculated by adding up your assets and subtracting your liabilities; essentially your debt. A simple way to think about it is this. If you were to sell everything you owned, stocks, home, cars, etc. And paid off all your outstanding debt, at the end how much cash would you have remaining? The amount of cash remaining is essentially your total Net Worth. And this number is really the true value of your real wealth.
Unfortunately, when people hear about wealth, most people automatically think about income. How much does he make? Oh wow, $300,000. He’s rich. But income is just one piece of the story and if you really want to understand someone’s wealth, you have to look at their total net worth. There are countless stories of people who make high incomes, yet when you look at their net worth, they are actually ridiculously poor because of how much debt they have in relation to their assets.
If you grew up in the 90s, you should be familiar with MC Hammer. MC Hammer was one of the hottest rappers in the 90s when I was growing up. With amazing hits, at the peak of his career, he was earning up to $70 million annually. But without good money management habits, he spent it all on ridiculous luxury items. At one point, he owned 17 luxury cars, a private jet, 2 helicopters, and 21 race horses.
You can probably guess where this led him. In 1996, he filed for bankruptcy with over $13 million in debt. Within just a few years MC Hammer went from earning $70 million dollars annually to being broke with $13 million in debt. This is why tracking our net worth is so important. Earning is just one side of the equation. Making a lot of money doesn’t automatically make you rich. It’s keeping it, that will. And the net worth is the ultimate KPI that will show how you are performing.
If you don’t like manually calculating your net worth, there are online software like Personal Capital or Mint that will do it automatically for you. You just need to input the account information for all the investment assets you own as well as other assets you own like your property or cars. And make sure not to forget your debt. There is no specific target here. Higher your net worth the better.
When my wife and I started our debt paydown journey over 10 years ago, our net worth was actually negative. However, over time. But meticulously tracking it month after month, really motivated us to increase this number; either by increasing our investments or reducing our liabilities.
2. Monthly Spending Trends
Number two on our list of personal KPIs to track is Monthly Spending Trends. It is just what it sounds like. What is your total monthly spending and how is it performing compared to last month or last year? When I speak to people about their personal finances for the first time, most often they want to jump to sexy topics like investing or real estate.
But the reality is, that your spending behavior has a much bigger impact on your financial life than any investment ever will. Just like our example of Mr. MC Hammer. You can be making $70 million dollars a year, but if your spending isn’t under control, you can still be broke. If you never had a budget or monitored your spending before, I would recommend meticulously tracking all your spending every month for at least 3 months.
This would include everything from your home mortgage and insurance payments to discretionary spending like food and entertainment. It could surprise you how much you spend on eating out. Or it might not. The key is to get a good grasp of your spending pattern. How much does your monthly lifestyle cost? Is it reasonable in relation to how much you make? Or are you not comfortable with it If so, what is the target you want to hit?
Let’s say you want your monthly average expenses to be no more than $8,000 monthly when you add everything up. But your spending trend shows that you are closer to $10,000 monthly. This is good because now you have real data you can work with to change your behavior. My wife and I still do this at least several times throughout the year.
We find something new almost every time. For example, a subscription service that we weren’t using. Or realizing how much we were spending on gas every month.
3. Saving Rate
Number three on our list is Savings Rate. Simply, it is the percentage of your income that you are able to either save in your savings account or invest in assets. When you can manage your expenses well, this is the other side of the formula you can really start increasing. Once my wife and I had paid off our student loans, this was the next key performance indicator we really monitored closely.
If paying down $105,000 of student loans taught us one thing well, it was to really manage our expenses. Every month we were juicing out every penny we could from our budget to pay down our student loans. Once that debt was paid off, we were able to shift that extra money to our savings and investments. And so whereas before it was “how much can be put towards our debt” the new game became “how much can we save and invest.” And the savings rate gave us a clear picture of our performance.
Once I knew how much we needed for our baseline expenses, we were able to dial up our savings rate every year with our increasing salaries. Our savings rate ranged from 10% to at one point even 50% of our income. It wasn’t easy, but having a clear metric really motivated us to push toward improving that number.
And this is especially relevant if you have an outstanding debt that you really want to pay off. If you have student loans, car loans, or any other higher interest debt, you want to pay it off as quickly as possible. And the way to do that is by having a clear picture of how much you owe, at what interest rate, and to whom. When we were paying down our student loans, I had a very detailed spreadsheet that showed each student loan amount and the interest rate.
Every time one was paid off, I would cross it off from the list and celebrate with my wife. Of course without spending any money. If you are debating if you should pay off some of the debt you have because the interest rates are so low. For example, like your home mortgage, I’m going to borrow a chapter from JL Collin’s book – The Simple Path to Wealth.
JL recommends the following: Less than 3%, pay it off slowly and route the money to your investments instead. Between 3-5%, do whatever feels most comfortable: Either put the money to debt payment or investments. More than 5%, pay it off ASAP. You’ll need to decide what’s best for you. For my wife and I personally, we decided to pay off all our outstanding debt regardless of the interest rate except our home mortgage.
5. Credit Score
Number 5 on our list is Credit Score. When I speak to people about personal finance for the first time, for some reason, this is one indicator many people like to discuss. What is interesting is that they could be under $100,000 of student debt and have no idea what their monthly expenses are, but they are immensely proud of their credit score.
And this isn’t completely their fault. The financial industry has done a great job of marketing the crucial importance of Credit Scores. And I believe it is important, but of all the metrics that we just reviewed, I would actually dare to say it is the least important of them all.
A good credit score will allow you to get favorable terms when you are shopping for a mortgage or applying for credit cards. However, don’t get too obsessed over it. When you have a good credit score, you are just signaling that you are a good candidate for banks and financial institutions to target for their debt-related products.
That said, if you are responsible for your payments and are not maxing out your credit card every month, you will likely have a good score. You want to target at least above 700. 850 is the max. I would recommend using free services like Credit Karma to keep track of your credit score on a regular basis.