“What gets measured, improves” is a business adage attributed to dozens of leaders, including Peter Drucker and Steven Covey.
The truth applies not just to managing small businesses and large corporations, but also to your personal finances.
Imagine your financial metrics are like vital signs at the doctor’s office or progress markers with your personal trainer. There are specific numbers you can compare to your goals to know where you stand, where you need to go, and very often, what you need to do next.
Here are eight of the most important metrics for your financial success.
1. Net Income
What It Is: (Total Monthly Income) – (Total Monthly Expenses)
For example, if your total take-home income is $3,800 and your expenses are $3,000, your net income is $800.
What It Means: Your net income is how much money you have at the end of each month. If your household were a business, this would be your net profit. It’s the money you can save, spend on debt, or use to go on vacation or upgrade your car.
Where to Aim: There is no upper limit where more money left over after expenses is a bad thing. So the higher this number is, the better. If it’s below zero, you’re in serious trouble and should do everything you can to change that as quickly as possible.
How to Get There:
- Cancel unused subscriptions to reduce monthly expenses.
- Pay down credit cards to lower your monthly minimum payments.
- Consider an extra income source from a side gig or second job.
- Consider ways to reduce your utility expenses, like blocking drafts or installing a low-flow showerhead.
- Find one large expense you can eliminate or reduce.
2. Emergency Fund Size
What It Is: This one’s simple. If you have $300 in your emergency fund, your emergency fund size is $300. If you have $2,400, it’s $2,400.
What It Means: An emergency fund is money you’ve saved to use instead of credit cards when unexpected expenses come into your life. You should keep it in an account you can access immediately. The higher the balance, the better you can weather financial storms, but there comes a point of diminishing returns. Eventually, putting another $1,000 in your emergency fund makes little difference in your ability to handle financial emergencies, and the money could be put to better use elsewhere.
Where to Aim: Most experts agree you should aim for three to six months’ worth of expenses. If your lifestyle costs $3,000 a month, then you would want $9,000 to $18,000 saved.
How to Get There:
- Make a payment to yourself each month by adding money to your emergency fund.
- Split bonus checks and tax refunds in half, giving half to the fund and spending half on yourself.
- Hold a garage sale, sell some items on eBay, or find another way to raise some extra cash for your fund.
- Ask your bank if it has a rounding function on debit card purchases, where it rounds up transactions to the nearest whole dollar and puts the difference in savings.
3. Savings Rate
What It Is: (Amount Invested in Savings Each Month) ÷ (Monthly Income)
For example, if your monthly take-home income is $4,000 and you save $400 each month, then your savings rate is 10%.
What It Means: Your savings rate shows you how much of your money goes toward your retirement, emergency fund, and other long-term needs. It’s a good measure of financial health because it indicates both disposable income and smart decision-making.
Where to Aim: Most finance experts suggest your savings rate should be between 5% and 20%. Of course, higher is better, but there’s no point in setting unrealistic goals.
How to Get There:
- Maximize all fund-matched offers from your employer to add free money to your savings rate.
- Take advantage of tax-advantaged savings accounts like an Individual Retirement Account (IRA), 401(k), or health savings account (HSA).
- Create a policy where for every optional expense you splurge on, you put an equal amount of money into your savings.
- Make savings contributions on payday, so the money is gone when temptation strikes later in the month.
4. Debt Payments
What It Is: This is the total minimum payments for all debt accounts except your mortgage. For example, if you have four credit cards and a car loan with minimum payments of $75, $125, $100, $200, and $250, your debt payments would be $750.
What It Means: This represents money you’re getting very little value from. Knowing it helps you to stay motivated to pay it down as quickly as possible. Some people get even better results from calculating this as a percentage of take-home pay.
Knowing you spend $750 a month on debt payments is important. If you make $3,000 a month, realizing you’re spending 25% of your income on those payments can be a useful gut check.
Where to Aim: Ideally, this number should be zero. You may have a mortgage, but your credit cards will be paid in full each month during the interest grace period.
How to Get There:
- Identify your lowest-balance loan and pay it off aggressively. Then use its minimum payment to help pay off the next-highest-balance loan. Repeat until you reach zero.
- Put credit cards away and remove their information from your computer to avoid increasing your credit card debt.
- Apply the money-saving ideas elsewhere in this article to find more money to pay off debt.
- Consider — carefully — a home equity loan or consolidation loan to reduce your monthly payments and interest.
5. Debt Total
What It Is: This is your total balance for all debt accounts except your mortgage. If those four credit cards and the car loan we mentioned above had balances of $1,200, $1,800, $4,000, $6,000, and $11,500, your debt total would be $24,500.
What It Means: This is how much money you owe others. It’s the opposite of your net worth. The higher your debt total is, the more money you’re spending making other people rich rather than on living your life and spoiling your kids and grandkids.
Where to Aim: Again, this number is ideally zero, but very few families are at that level. For reference, the average amount of consumer debt for American households was $33,000 in 2018.
How to Get There: The same techniques for reducing your debt payments work for reducing your debt total. These two metrics go hand in hand, and taking care of one helps take care of the other.
6. Net Worth
What It Is: (Total Dollar Value of Your Assets) – (Total of All Debt, Including Your Mortgage)
For example, if you have $50,000 in retirement savings, $5,000 in general savings, stocks worth $12,000, and $30,000 of equity in your home, your net worth is $97,000.
What It Means: Your net worth is how wealthy you are. It’s how much money you could access if you wanted to retire or take a long sabbatical from work. Rob Kiyosaki, a bestselling author, and lecturer on financial independence, defines wealth by asking, “How many days could you survive if you stopped working today? How long could you survive on the amount of money you have?”
Where to Aim: For most people, net worth is relevant primarily to retirement. As soon as you have enough assets to live off of them instead of a job, you might be considered to have enough net worth.
The higher your net worth, the better, but the experts at Debt.org recommend taking 80% of your monthly expenses and multiplying it by 20. That should be enough to generate interest sufficient to keep you in a lifestyle similar to what you’ve had during your working life.
How to Get There:
- Maximize all fund-matched retirement plans through your employer.
- Maximize all tax-sheltered retirement contributions as soon as you can.
- Once you’ve paid off your debt, put at least half of what you had been paying toward retirement savings.
- Work with a financial advisor to find the best investment accounts for your goals.
7. Debt-to-Income Ratio
What It Is: (Monthly Net Income) ÷ (Total Monthly Debt Payments)
If you’re making $3,000 in payments on credit cards, your mortgage, and other loans, and your take-home pay is $6,000 a month, then your debt-to-income ratio is 50%.
What It Means: This indicates how much of your monthly cash flow is going toward debt service, as opposed to savings and other bills. It’s a good motivator to kill your debt. It’s also one of the key factors lenders consider when approving credit and setting interest rates.
Where to Aim: The minimum debt-to-income ratio for most mortgages is 43%. Lower ratios mean you keep more of your money and qualify you for better interest rates, so lower is always better.
How to Get There: This is another category where the debt reduction practices mentioned earlier are valuable. Debt is among the most problematic issues facing a person’s financial health.
8. Credit Score
What It Is: Your credit score is a formula created by the three major credit bureaus. You will never be able to hand-calculate the formula, but you can get a free copy of your report from all three credit bureaus once each year.
What It Means: Your credit score is an abstract analysis of how likely you are to make payments on debt on time and how unlikely you are to default on any loans. Potential lenders use it to decide whether or not to give you credit, how much credit to offer, and how much interest they will charge.
Where to Aim: Credit scores range from 300 to 850. Anything above 720 is excellent, with 690 being the minimum to get good credit deals. At 630 to 689, you can still get credit, but it will be expensive. Scores below 630 make it hard to get credit at all.
How to Get There:
- Pay your bills on time to avoid late payments appearing on your record.
- Put utilities on a credit card and pay them off on time to establish a pattern of payment.
- Keep balances on credit cards and lines of credit low.
- Leave zero-balance accounts open to keep your available balance score high.
- Check your credit report for errors every year.
Final Thought: Prioritizing
Each of the metrics above provides important details in your financial life, but you need to determine which factor is most important to you.
The best way to choose which metric to focus on first is which one will make the biggest difference in your goals for the next two years. If that still leaves you choosing between several options, aim for the one that’s easiest to reach. The energy and the improved financial situation you’ll receive from your success will make it easier for you to tackle the other items on the list.
Lincoln Lyons lives in the Seattle area and runs a consulting business where he assists small companies in the best ways to run their corporations.