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Personal Finance Metrics are essential! They will allow you to track your progress to success in your personal finances. Metrics have the advantage that they are easy to compare and that you can work on improving them one after another.
Metrics are especially important if you are on a journey towards Financial Independence. You will need to track and improve many metrics to become Financially Independent. Just tracking a metric is meaningless. You need to make sure this metric improves over time. Or, at the very least, you need to make sure, this metric does not get worse.
In this post, I will list The 11 Most Important Personal Finance Metrics you can find. If you track these 11 personal finance metrics and you work on improving all of them, you will be well ahead of the majority of people who probably do not track more than one or two of these personal finance metrics.
There is no denying, your income is essential! The more income you get, the easier your personal finances will be to manage. And if you want to reach Financial Independence, your speed will be relative to your income.
There are several ways of calculating the income:
- Gross Income: This is what is on your employment contract. Your gross income is what you are generally discussing with your company.
- Net Income: This is what you receive month after month on your bank account.
- Net Income After Taxes: This is the Net Income minus the taxes you pay to the state.
For most things, the Gross Income is a useless metric. For instance, for me, about 7% of my Gross Income is going to direct taxes. But for some people, it is more than that. There is no point considering some money that you will never receive. You only want to consider the money that you can use!
Some people use Net Income After Taxes and do not consider Taxes as an expense. For me, the taxes are simply an expense, and I only consider my Net Income. But both metrics are fine.
If you want to optimize this crucial personal finance metrics, you need to increase your income. Now, there are ways to grow your income. If you want to improve the state of your personal finances, increasing your income can go a long way.
I have said that your income is significant. But it is useless if you spend it all. A substantial income is only interesting if you do not spend it all.
Therefore, the amount of your monthly expenses is significant. You need to know how much you are spending month after month and year after year.
Something that not many people consider is that your expenses are going to change a lot from month to month. You are going to spend more the month where you buy these airplane tickets. Therefore, the absolute value of your monthly expenses is not very interesting. The average monthly expense total is something much more enjoyable.
Ideally, you also want to make sure that the data from your yearly expenses is relevant. If you buy a car every ten years, you do not want to take that particular year as the base for your monthly expenses. If you want to do something exact, you can take the average yearly expenses over the last five years and average it again for your monthly. Your average expenses should give you a good picture of how much you spend.
To optimize your expenses, you need to reduce your spending. For instance, you could find some expenses that are not necessary anymore. Or find things you could get cheaper than you get them now. An easy budget to slash is your food budget. Most people can easily reduce it by shopping at another shop.
3. Personal Inflation Rate
Inflation Rate tells you how prices of goods are increasing, or decreasing, year after year. Every country measures inflation in its economy. It is an essential economic figure.
However, it may not relate to you. It is calculated based on the average of all the households in your country. What you want is your Personal Inflation Rate. It is the rate at which your expenses are increasing year after year.
It is straightforward to compute. You take the sum of your expenses of any year divided by the sum of your expenses of the previous year. You subtract 1 to that number, and you will get the inflation for this particular year.
For instance, these are our Personal Inflation Rates for the last four years:
- 2015: -7.4%
- 2016: +16%
- 2017: -7%
- 2018: +12%
As you can see, we are not a good example of inflation. Our expenses are all over the place. Even in 2018, where we watched our expenses quite carefully, we had a 12% inflation rate!
When considering your Personal Inflation Rate, you need to be careful about some events in years. For instance, in 2018, we got married, adding a lot of expenses.
Here I have described the Global Inflation Rate of your spending. You can also compute your Personal Food Inflation Rate, for instance, or your Personal Holiday Inflation Rate. You can be creative and calculate it for any expenses in your budget.
Generally, it is a bad thing if your expenses increase year after year at a higher rate than the inflation in your country. Ideally, you do not want your expenses to increase. Ideally, you want your Personal Inflation Rate to be below inflation. Your Personal Inflation Rate is another way to keep your expenses on track!
4. Savings Rate
If you know your income and your expenses, it is then trivial to know your savings rate. For me, The Savings Rate is one of the most critical Personal Finance Metrics.
Your Saving Rate will tell you how much of your income you are saving. It is straightforward to compute. Your Savings Rate is equal to (Income – Expenses) / Income. For instance, if you earn 4000 USD and you spend 3000 USD, your savings rate will be 25%.
Generally, you compute a monthly savings rate. However, you can also calculate a yearly savings rate. Either you take the yearly income and the yearly expenses and compute the savings rate based on that. Or, you can also take the average of the twelve months’ savings rates. These two numbers are both fine and interesting, but they are different. You just need to be aware of that.
At the very least, your savings should be positive. I firmly believe that everybody should have a Savings Rate of at least 10%. If you want to reach Financial Independence and Retire Early, you will need to save significantly more than that. With a higher Savings Rate, you will become Financially Independent faster.
If you want to improve your savings rate, there are two things you can do: Grow your Income or Reduce your Expenses. Both will have a substantial effect on your savings rate. I am doing both to improve my savings rate. When I started this blog, I had an average savings rate of 10%! Now our average savings rate is about 45%!
5. Net Worth
Your Net Worth is an essential personal finance metric. Your net worth will tell you how much you own if you were to put all your money together. Your net worth is an excellent indicator of wealth.
Of course, it can tell you how much you would be able to spend. But more importantly, it could tell you how far, or how close, you are to Financial Independence. That is the main reason why you will see the net worth mentioned in all Personal Finance blogs.
Computing your net worth is not very difficult. You need to sum the value of all your assets:
- Bank accounts
- Broker accounts
- Your house or other real estate properties
- Retirement accounts
And then, you need to subtract your liabilities:
- Credit card debt
- Car debt
- All your other debts
This formula will give you your net worth. For more details, I wrote a guide on how to compute your net worth.
Be aware that it is not always easy to compare your net worth with that of other individuals. A good net worth value will be different from country to country. And even sometimes from state to state. How good is your net worth also depends on the cost of living. If you are happy about your net worth, do not let anyone else deter you!
There are two main ways to increase your net worth. The one you should focus on directly is to decrease your liabilities. For this, you need to pay off your debt. You do not always have to all your debts before you start investing. For instance, a low-interest mortgage is not as bad as a very high-interest credit card debt. Personally, the only kind of debt I would consider keeping is a mortgage. All the other mortgages are easily avoidable.
Second, you can increase your assets. All the money you are saving is going to inflation your net worth. But this is going to take a long time to pile up unless you have a substantial income and large savings rate. The way to make it faster is to invest some of your money. There are many ways to invest your money. You could invest in the stock market, in a company, in real estate, or in anything that appreciates. Investing will significantly accelerate the growth of your net worth.
6. FI Number
You are Financially Independent when you have enough savings or passive income to cover your expenses for life.
If you base your Financial Independence (FI) on your net worth, then your Financial Independence number, or FI Number, is the amount of net worth you need to accumulate before you are financially independent.
The standard rule that is used for Financial Independence is the 4% rule. In that case, you need to accumulate 25 times your running expenses. For instance, if you spend 50’000 USD each year, your FI number will be 1.25 million USD. Once your net worth is equal to or higher than your FI number, you are financially independent. That means you can withdraw 4% of your net worth, adapted for inflation, every year, and cover your expenses with that. And your investment returns should make it so that you can withdraw this money forever.
Now, it is not always as simple as that. Some people use another Withdrawal Rate than 4%. And it is sometimes difficult to know how much you are going to spend in retirement. And if you get some guaranteed income like a pension, you can reduce your FI number accordingly.
If you want all the details about this metric, read this guide on how to compute your FI number.
7. FI Ratio
Another important Personal Finance Metrics you want to track if your Financial Independence Ratio or FI Ratio. This ratio will tell you how close or far you are from being financially independent.
This number is elementary to compute. It requires that you know your Net Worth and your FI Number. Once you know these two numbers, you can simply divide your Net Worth by your FI Number, and this will give you the percentage of your progress towards FI.
For instance, if your FI number is one million and you have 120’000 USD, your FI ratio will be 12%. That means you have done 12% of the journey towards Financial Independence.
Increasing your FI ratio can be done either by increasing Your Net Worth or by Reducing Your FI Number. For the first case, it requires you to save more money or to increase your income. And for the second case, it will require you to spend less money or to increase your passive income. As you can see, all the metrics are related!
For more examples and details, read this guide on computing your FI Ratio.
8. Passive Income
I have already talked about Income as personal finance metrics. However, there are different kinds of income. Passive Income is a subpart of your income that is especially interesting.
Passive income is something that you earn without doing anything. There are many forms of passive income.
The most used Passive Income is dividends from the stock market. If you invest in the stock market through a passive index fund, you will receive some interest quarterly. That means that by doing nothing, your investments are going to pay off!
Another well-used form of Passive Income is Real Estate. If you own some piece of Real Estate and you rent it to someone, you can earn some money month after month. It is not entirely passive income since you will have to maintain your property and find renters. But it can be more passive if you hire a property manager to do some of the work for you.
Many people also say that a blog is a passive income. But I would agree that it is not passive at all. Most bloggers spend a lot of time on their blogs every day. Blogging is not passive at all.
The advantage of passive income is that it should last until after you retire. And you can use passive income to cover some of your expenses. That means that all your passive income should consequently reduce your FI Number. Developing some passive income streams can make your road to Financial Independence significantly faster!
9. Investment Fees
An essential Personal Finance Metric is the Investment Fees that you are paying. It represents how much money you are paying each year on your invested money.
Minimizing investing fees is extremely important. Most importantly, I do not understand the importance of this. If you have an investment portfolio worth 200’000 USD and 1% of fees on it, you are losing 2000 USD every year! Cutting it down to 0.5% could save you 1000 USD per year. And this is more and more important as your net worth is growing.
The primary way to reduce your investment fees is to only invest in low-cost passive index funds! I only invest in passive index funds, and my total Investment Fee is less than 0.1%. Since you invest this money, it will compound year after year. And compounding is a powerful tool!
Do not make the mistake of minimizing the importance of your investment fees. Optimizing investing fees is something you should focus on early in your investing journey!
10. Asset Allocation
You should always keep track of Your Asset Allocation! When you start investing, you need to choose your target asset allocation. At its core, your target asset allocation is how much you allocate to bonds and how much you allocate to stocks. For instance, I am trying to allocate 80% to stocks and 20% to bonds.
And you can take your target asset allocation a bit farther by also integrating your portfolio allocation. For instance, my allocation of 80% of stocks is further divided into 70% World, 10% U.S., and 20% Switzerland.
You need to take your target asset allocation seriously. If your situation changes, you need to make sure your asset allocation is still valid for the new situation.
There is another thing you need to track is your current asset allocation. Your target asset allocation is what you have decided to invest in. Your current asset allocation is what you are invested in. It is the current allocation of all the positions in your net worth. For instance, even though my target allocation to bonds is 20%, at this time, my current allocation to bonds is more than 30%. So, I still need to invest more in stocks to balance my net worth.
Tracking your current asset allocation and making sure it follows your target asset allocation is essential to your investments. You do not have to track it every day. You should not track it every day. But making sure once a month of where your net worth is going is essential!
11. Emergency Capacity
And last but not least, your Emergency Capacity is one of the most important of your Personal Finance Metrics. This metric will tell you how equipped you are to deal with an emergency money issue.
When an emergency occurs, you do not want to have to sell shares of your investment portfolio to cover the unexpected expenses. Most people will advise a large emergency fund to cover these expenses. However, an emergency fund is not the only way to react to an emergency.
In your emergency capacity is also the amount you can pay by credit card. For instance, I have a 10’000 CHF limit on my credit card. That means that with my emergency fund of 10’000 CHF, I have 20’000 CHF available in case of emergency before I would need to sell any shares.
You do not need to have a very high emergency capacity, but you need to have some. If you do not, you may be in big trouble. You can count on your emergency fund and your credit cards to cover your emergency expenses. The sum of your line of credit and your emergency fund is your Emergency Capacity.
Bonus: How To Track Personal Finance Metrics
Now that you know all these helpful Personal Finance Metrics, it may be worth spending some time discussing how to track these metrics.
I do not think you need any specific tool for this. You especially do not need a commercial tool to do that. You can do it on paper. It will be fine if you do not lose the papers and hence all the data.
Even though doing it on paper is fine, I would recommend using a Spreadsheets tool for that. If you have Excel, you can use it. But you can also use Google Sheets that is entirely free. Just put all your metrics there. Then, for each new month, add a new column with the month. You will then have a nice view of how all these metrics are evolving. And if you feel like it, you can even add graphs and custom formulas to make it fancier. But only having all your metrics in a nice spreadsheet will already help you a lot!
There are many Personal Finance Metrics that you can track. I believe that everybody should be aware of these Metrics. And people that are trying to become financially independent should track all of these!
Not only should you track these metrics. But you should also try to improve these metrics. I have outlined ways to improve each of the 11 personal finance metrics in this article.
Several of these personal finance metrics are interlinked. For instance, if you improve your income, you are likely to improve your savings rate as well. And if you increase your net worth, you will increase your FI Ratio. And there is also some correlation in their growth rate. Increasing your savings rate will increase the rate at which your net worth grows, for instance.
There is no perfect number for any of these metrics. Therefore, you can always work on improving these personal finance metrics. However, at some point, you will have to be content with yourself. You also need to consider how much time and effort you are investing in improving these metrics. It may be worth spending one hour a week to improve your savings rate by 10%. But it is hardly worth it for less than a 1% increase in your income.
To make sure you are keeping track of these Personal Finance Metrics, you can make it a part of your personal finance routine. For example, take a look at my monthly personal finance routine.
What about you? Which Personal Finance Metric do you track? Do you have other examples of metrics?