The Scoreboard Does Not Lie In Personal Finances
“You are what your record says you are” — Bill Parcels
Finance Like an Adult
Simple solutions are the best option to solve complex problems. It is easy to recognize your record in the NFL, but not so much with your personal finances. Choosing straightforward metrics to measure will strengthen your relationship with your personal finances.
If you want to start with a high-level summary, please skip to the end and read the 50 Word Takeaway before continuing.
What Should You Measure?
The correct answer is, it depends. There are too many personal financial metrics available to keep track of them all . You need to assess your personal financial life and decide what needs to be measured.
Deciding what needs to be measured can be a complicated process. The easiest starting point is reflecting on, what in your personal finances causes the most anxiety? The three areas to consider are the three components of your personal income statement: income, expenses and net income.
Tracking Your Net Income
For the majority, the most important concept to measure with your personal finances is whether you are living within your means. Knowing your income and spending individually are important, and you need to know the total amount for each to understand if you are living within your means.
Below is an example of a simple graph to detail whether you are living within your means:
A “Net” amount above the line indicates that your income is greater than your expenses and that you are living within your means. An amount below the line indicates the reverse, that you are not living within your means.
This high-level review is the baseline to assess whether your personal finances are in order. However, there are additional measurements that you can use to assess your personal finances. For example, tracking your bank account balance over time illustrates how much money you have available over time.
It is important to establish a minimum amount that you want to hold as your safety net (e.g., the lower orange line below). Once you comfortably maintain this minimum balance, you can establish a balance when you would like to use your bank account balance to pay above the minimum on your debt, invest, donate to charity or any other purpose you would want to spend a significant amount of money on (e.g., the higher orange line in the graph below).
See below for an example of what a graph detailing your bank account balance over time could look like.
Your bank account balance is one metric you can track to assess your personal finances. Others include: your credit score, debt levels, investment fair values, net worth etc. The most appropriate measurements depend on the context of your unique financial lifestyle.
Tracking Your Income
Are you worried about whether you make enough money? The vast majority of us do. The question for you is, does your income cause the most anxiety when thinking about your personal financial life?
You can keep track of your total income over time in a simple table or graph, see below for an example. This high-level tracker is simple to create and lets you know immediately whether your income is increasing or decreasing over time.
However, if you require a more detailed approach there are two components of your income to measure over time: your (1) active, and (2) passive income.
If you would like to measure your active income over time, consider whether you remained in the same job(s) or changed at any point throughout the year. Once you tracked where you worked year over year, track whether your income has increased because you have gotten a raise, bonus, took on extra hours or any combination of the three. Also track for each of these in reverse if your income is decreasing.
The next step is tracking your passive income over time. It is important to separate all sources of passive income that you earn and compare them side by side, in addition to comparing your total passive income year over year. Examples of passive income streams are: investment returns, a side hustle, credit card rewards etc. Graphically this is simple to track, as seen in the example below.
Tracking Your Expenses
Is your spending under control? If you are not sure, then it makes the most sense to focus on tracking your spending over time. You can keep track of your total spending on a simple graph, below is an example of tracking spending by month from 2019 through 2021.
This high-level tracker illustrates the trend of your spending over time. This is crucial to alert yourself whether there is a problem or if you are moving in the right direction.
You can also add in an average to your graph to let you know how your spending compares to the overall average of that time period. This average will also show if you spend more money during a certain time of year, for example many people spend more money in December when shopping for the holidays.
You can absolutely break down your spending further if necessary. Not all spending is created equal. Large transactions can make certain months appear as outliers, based on the example above, perhaps you bought a car in May of 2021. If this is the case, then the above average spending is expected and not concerning.
In addition, there may be categories of expenditures that you do not want to include in your summary. For example, large debt payments over the minimum, money invested or donated to charity may not be appropriate to consider in your spending summary.
Inclusion in your summary is all about the context of your spending. If this spending is responsibly budgeted and aligns with your future benefit or passion, then it may not be appropriate to consider large chunks of spending.
However, if you are spending a significant chunk of your income through investing or donations, then it makes sense to track this spending to ensure your spending remains responsible.
Takeaway: In 50 Words or Less
There are too many personal financial metrics available to keep track of all of them. The most important concept to measure with is whether you are living within your means. Once you know, you can move on to specific measurements of your income, expenses and net income.
Please reach out to email@example.com with any questions or suggestions for other personal finance topics to cover.