“If you can’t measure it, you can’t improve it.”

How do you measure success?

In business, this is usually based on Key Performance Indicator (#KPI) set up at the beginning of the year and evaluated throughout. KPIs keep you focused on the goal at hand.

But, what about your personal finances? How do you know you are managing your finances well? Earning more is great, but are you using your money efficiently?

Well, enter the Personal Finance KPIs. It's a list of metrics that you should track and work to improve as the years go on. A little Google search will result in multiple iterations of this list, so you’ll have to find which ones work for you. Each one of us have different financial goals after all, so one metric may work for one person for a few years, but after a while, it may be time to retire an old metric and add a new one.

We think this list is pretty good, but let us know in the comments if there’s a specific metric we should add for next time.

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1. Net Worth

Net Worth is the assets you own minus the liabilities you owe. This is a fairly straightforward calculation that will ask you to list all of your assets and all of your liabilities. Then you’ll just subtract the liabilities from the assets. The result is your net worth.

You want to aim for your net worth to be positive and it should grow year over year. For those just starting out with student loan debt, your net worth may be in the negative. That’s OK. Work towards paying off your loans and investing at the same time. Your net worth provides a snapshot of your financial situation. It can fluctuate if part of your assets are in stocks and the stock market is doing its thing, but the general trend over the long period should be that it’s going up.

2. Credit Score

This is a number that rates your credit risk and can determine your credit approval and rates for borrowing. The Credit Score is not something you can calculate personally as it is a score calculated by the credit bureaus, but it’s easy enough to find. A credit score takes into consideration a few factors: length of credit history, new credit, amounts owed, and payment history. This is where it’s important to understand current debts and use the automatic payment options to ensure you are paying debts in a timely manner.

The Credit Score can be obtained from the 3 credit bureaus: Experian, TransUnion and Equifax. Many credit cards now offer this feature as a free option so check if your existing cards have it. If you do sign-up to get your credit score, make sure you aren’t committing to a subscription option.

It’s good to know this number year over year so that you can work to improve it. A Very Good credit score as shown below can help you get lower loan rates and can be a huge negotiating point so keep that in mind. After you’ve reached the Exceptional level though and you’ve been diligent about your credit usage and payments, this is probably one metric that you don’t need to track too often, but good to to know what it is before applying for a loan.

3. Savings Rate

This is your Net Income minus Expenses divided by Net Income. The Savings Rate shows how much of your income is left over after paying the bills. Conventional wisdom advises to save 10%-20% of your income, but a lot of projections show that is not enough. If you are pursuing financial independence, your Savings Rate should be 40% or greater. Using a mixture of income increases and expense optimization, strive to increase your savings rate year over year.

The current personal savings rate for Americans according to data from the St Louis Fed is shown below. It’s hovered around an average of 10% and in the time before 2000, that may have been enough, but the rise in healthcare and other expenses means we all will need to save a bit more for the future.

4. Income over Time

5. Expenses over Time

One metric we don’t nearly track enough of is Income. I, think partly because if we work a standard nine-to-five job, this metric can be consistent, but it’s still good to see how your income is growing year over year. Income is essential. The greater the income, the easier life can be, but income is only significant if your expenses don't use it all up. Of course, tracking your income isn’t enough, it’s also important to track it against expenses. Expense trends can show you where your money is going.

• Are you doing a good job curbing your expenses or are you hitting lifestyle inflation hard?

• Are there years where you are spending more? We’d like to believe that our expenses stay consistent, but life isn’t predictable so there may be years when the income and savings are good, and years where unexpected expenses crop up. It’s good to have a handle to both of these scenarios for future planning.

6. Investment Fees

The money you are paying on your investments. These are all of the fees associated with where you park your money. Why track this? It’s important to track this because fees can eat up your investment gains over time. It’s also important to review your investments a few times a year to make sure your investments haven’t drastically changed since you put in your first dollar.

One of the pillars of FI is to invest in low-cost index funds that track the total stock market. This recommendation saves you a lot of money as it greatly reduces your investment fees and still allows you to participate in investment growth.

How can you determine your investment fees? One way is to review all of the funds you invest in and find the expense fees for each. Another way is to use an app like Personal Capital which allows you to connect to all of your accounts and use their Fee Analyzer to provide a breakdown of all of the fees you pay on your investments. Personally, this is one of the reasons I love Personal Capital. 1) It’s free to use. F2) The Fee Analyzer is amazing especially if you have multiple accounts. Find our review here. Sign up and get $20 from Personal Capital.

7. FI Number

This is your Yearly Spending over your Withdrawal Rate. This is the amount of Net Worth you need to reach Financial Independence. This number is pretty popular in the FIRE community. It’s basically what you need to save up (nest egg) in order to reach financial independence. This is a good metric to have on hand, but a few things to keep in mind, especially if considering retiring early with this number:

• This number may include accounts that you can’t touch until you are 59 1/2 unless you want to pay early withdrawal penalties.

• This number may include accounts that you haven’t paid taxes on so the amount will lessen due to taxes.

• Yearly Spending can fluctuate as you will see with the Income and Expense Over Time metric so you’ll need to account for this.

• You’ll also need to figure out which withdrawal rate work for your needs. Here’s more on the Safe Withdrawal Rate. 4% has been the gold standard for a while, but there’s been a lot of questions regarding it.

I think this number is still good though as a goal so that you focus your savings instead of crossing your fingers and hoping the math works out later in life.

8. Income Independence Index (III)

This is Passive Income over Total Annual Income. III measures how much of one’s income comes from passive sources. This is where it’s important to have assets that are income generating. When you do the Net Worth exercise, you’ll find that you have assets that depreciate year over year and aren’t income generating. Passive income is the income that will eventually replace your regular income. The most common passive income comes from stock dividends. In order to find this, you’ll have to figure out how much and how often you receive dividends from your stock investments. The other common passive income is from rents which after paying off any loans related to the property, the future payments can be use to cash flow and existing lifestyle.

What do think of this list? Have you heard of all of these metrics before?

One thing we will note that of course an event like Covid-19 will surely influence some of the metrics here. Some of these metrics are also a snapshot in time so keep that in mind. To track these metrics, I think a simple Excel or Google Sheet or even piece of paper will do, just reference it at least once a year to update how you are tracking for the new year. Maybe, add this to your to-do-list for 2021.

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