Too Many Financial Metrics: What Should You Track?!

If you’re just starting to keep track of your own money, it can be a bit overwhelming. There are a ton of terms and financial metrics that seem important. Acronyms are rampant and if you don’t know what they are, it can be very intimidating to even try to learn.

I’m pretty sure this is why a lot of people just don’t take a big interest in their own financial security. It’s a common thing, actually, called analysis paralysis. When there’s so much to look at and compare and do, it’s easiest to just do nothing.

But if you’re serious about taking control of your financial situation and want to start…where do you start? With so many things to track, what’s the right thing to track? Let’s take a look…

Income, Expenses, and Savings Rate

At its most fundamental, your financial situation can be pretty easily summarized into two buckets: income and expenses. This is easy – if you’ve had a job, you have income. If you’ve spent money on anything, you have expenses.

When it comes to tracking these, the goal is that over time you see income rise and expenses either decrease, remain flat, or rise at a lower percentage rate than your income. If that happens, you’ll notice an increase in your savings rate. Your savings rate is a great indicator of your overall financial health. The more you’re able to save and invest, as a percentage of your income, the better off you are. If you’re spending all of the money you’re earning, you probably aren’t making much progress.

While these are great things to track, they don’t paint the full picture. Without knowing what else you have going on in your life – like your assets and debts – it’s just one indicator of your overall financial health.

Net Worth

Net worth is simply what you own minus what you owe. The general (often simplified) rule of thumb is that you can retire once your net worth reaches 25x your expenses. This would let you draw on 4% of the account value to sustain you pretty much indefinitely based on historic data. Interestingly, the man behind the number (Bill Bengen) has revised it to actually be 4.5% if you’re planning on a 30-year retirement.

But, sadly, this number too isn’t a ‘silver bullet’ indicator. Things change, markets fluctuate, and sometimes your net worth can be skewed by things that you shouldn’t really consider when determining if you have “enough” to retire. Still, though, net worth is an awesome indicator that you’re trending in the right direction. As your net worth increases, you are closer to having enough.

Passive Income

The ultimate goal of many people isn’t necessarily to draw down their accounts at all. Some people would prefer to live off passive income generated by their investments. Real estate is a very common way of generating passive income, as are things like dividend-producing stocks and other similar annuities.

I like looking at passive income as one component to know if I’ve got the flexibility of stopping my regular employment. If I can cover all of my monthly bills through income generated passively, I can theoretically quit – right?

While that may seem to be the case, it’s important to understand other things – like how my expenses are going to fluctuate over time – to really determine how comfortable I should be.

What Should You Track?

There are other metrics as well – ones that I’ll write about later and some that I won’t – that serve as indicators of your financial health. So which ones should you track?

Truth is, all of these metrics are meaningful in their own way. By themselves they can be good indicators of a piece of your overall financial health, but together they paint a more complete picture.

It’s important that you know each of these individually. What’s more important, though, is knowing how each of these impact each other. And, what’s MOST important, is knowing how these things are changing over time.

Getting a snapshot of any of these metrics at one given point in time probably isn’t really enough to do much with. But understanding how they’re changing and evolving can tell you if you’re on the right track or if you need to make some changes to get where you want to end up.

At the end of the day, there is a lot to be aware of. But don’t bury yourself in the details all at once. Figure out one or two things you want to focus on – for example expenses and savings rate – and get comfortable with those metrics. Then move on to other things, all the while keeping the basics in mind.

Question:

What’s your favorite financial metric to track??

You may also like

8 Comments

  1. So true! In my opinion, I don’t think you can track too many things, as long as you’re able to track and update them each month without losing your mind. For example, I track net worth with Personal Capital instead of tracking it myself. But this way we can look at the metrics that matter to us and filter out the noise.

    1. Yeah that’s very true. I think there are some basic ones that everyone should be doing (income, expenses, and net worth for starters are easy) but if you have more things you like to focus on (savings rate, ROE if you’re a real estate person, etc.) and you can do so without going insane then it’s all good.

      We use Personal Capital, too, to help with a lot of this. I’ll be writing a review at some point 🙂

      Thanks for stopping by, and stay safe with the hurricane coming in!

    1. Yeah I think net worth is good, but if you include your primary residence value on it, it might be painting a picture that isn’t super accurate to what you have available to you. (Related: https://www.marriedwithmoney.com/house-in-net-worth/ )

      I’m going to post about FIRE Prowess at some point here. My score is so sad, but I’m making strides to move that in a positive direction. What I like about that score is that it’s a bit more ‘active’ I feel like, and is impacted by more than just market fluctuations which could very well be the case for net worth.

  2. I think you nailed it with analysis paralysis. There is just an overwhelming number of metrics to use. My personal favorite is net worth. I think net worth acts as a comerstone to your financial health. If your net worth is increasing this means you are saving more then you spend, your investments are doing well and you’re paying off debt. Plus increasing your net worth means you are building assets that can be used to create a passive income stream.

    1. Yep I agree net worth is a huge one! Interestingly though it’s entirely possible to have a negative paper net worth and still be fine on cash flow in reality, for example through highly leveraged real estate. It may make folks uncomfortable no doubt, and it’s not without risk, but that is a good example of why it’s not something to look at in a total vacuum.

      Thanks for stopping by and sharing your thoughts!

  3. I use personal capital to easily track my net worth. I believe we need to focus on what our income will be during retirement. Social Security may not be around for me when I retire so I plan on having a mix of rental properties, military retirement pension, tax advantaged retirement accounts, and business.

    1. That much income diversification is an awesome plan! I’m not relying on SS for sure, and hope to have at least a few sources of income (rental properties, retirement accts, and I’ll probably have some sort of consulting or business income).

      We use Personal Capital as well – post on that coming up!

Leave a Reply

Your email address will not be published. Required fields are marked *