CFO of Life #108: 11 Financial Metrics you need to conquer your life

We waste so much time measuring what does and doesn't matter, and unsurprisingly, we get next to no results.

It is good to measure stuff, but it is hard to measure everything at the same time, especially from the get-go.

That’s why it is extremely important to focus on measuring the right thing, in the right way and on the right frequency. From here, you can see the 3 tracking problems - tracking the right thing, in the right way and on the frequency that makes sense.

This is tricky as in each stage of life, you should focus on tracking different things, as you would have different goals.

When you are young, you will need to track everything and anything regarding personal finances to ensure that you are doing well. As you age, you should focus more on your long-term goals ie. investments and savings and less on your day-to-day spending. This is normal, as you should have taken your time and learned those habits and built in your KPIs.

Weirdly, this is a common problem that all of us have had, have and will have as it is a normal thing.

While you build your habits, you need to track everything and you might not know how to use the information, which in itself is frustrating and discouraging, but you know I’ve got you!

That’s why in this week's newsletter, I will break down the topic of tracking what matters to help you improve your finances, focusing on:

1. Why do you need to measure any KPIs?

2. How to measure the different KPIs?

3. What do you need to know before measuring those KPIs?

4. What types of KPIs can I measure for my finances?

5. What are the top 11 KPIs I recommend that everyone measures for their finances?

?If this is your first time reading this blog, my name is Simeon Ivanov (Si-Me-On). I write this weekly blog about personal finance called CFO of Life to bring you on the journey towards becoming the CFO of your Life! I hope you like it and that you stick around for the long term!

Now, let’s get into the thick of it!

If you measure what you do, you can't easily control where you get and will never know if you have reached your goals.

If you measure everything, then you will be stuck in analysis paralysis and you will overdo everything.

But if you measure the right KPIs, then you can follow the right path for your goals. You can gain a deeper understanding if you are going the right way, the wrong way, or if you are stuck in the same spot!

You see, for me, my KPIs are my North Star which shows me if I am going the right or the wrong way. They show me my progress and make me extremely satisfied when I reach those set goals!

It all depends on the KPI and the reason why you are measuring it.

If you measure your Net Worth, then you might want to measure it in $ value and the number of months of "freedom" you have. This would give you a clear view of how much you have and how you plan to use it.

This is also valid for the way you track your savings; you can track how much $ you set aside each month, or you can track the % of your income that you save. The first will easily give you an understanding of the amount, but the second will open your eyes to the magnitude of your savings.

But beware, this is extremely important to get it right as it can have a detrimental impact on your willingness to do the work! Here’s an example of why:

Saving $10 is not a lot, but saving $10 out of $50 is a lot. This shows you why it is not only important what you measure, but how you measure it.

Essentially, before you measure a KPI, you need to know why you are measuring it and what way you will measure it.

Now, if you are new to personal finances you might have no idea what is happening and how to approach this. Don't worry, this is expected and normal. To find your “why”, you need to think of the reason why you are doing this and why you should be doing this. Personally, when I want to introduce a new KPI to measure, I try to ask the question, “Why do I want to measure this?” at least 3 times. It goes like this: “Why should I measure this?” - followed by a justification.

“But why should I do this?” - followed but a more detailed justification. “Well, but why actually should I measure this?” - followed by final justification.

If it does not pass this criteria, well, it was not meant to be, or maybe I don’t know enough on that topic. It is the same thing with what I want to measure with this exact KPI; if it does not pass the “Why?” test, it does not get measured.

For me, there are 3 different categories that you should track and each one comes with its beauty. Those 3 categories are - Financial Performance, Financial Health and Freedom.

Financial Performance KPIs for personal finance measure how efficient you are at managing your income and expenses. They focus on your ability to control spending, generate income and save for your future.

Financial Health KPIs showcase your stability and ability to meet your obligations, ie. pay your debt.

Freedom numbers are the KPIs which help you track your wealth and your path towards “Freedom”, by measuring your ability to live a desired lifestyle without being dependent on a job, hence showcasing your financial independence and security.?

There are quite a few KPIs that you can track, and each one would be as good as the previous one. But you must pick your battles and choose the KPIs that work best for you, your situation and your goals. And while I can't predict what will work for you, I can easily tell you what works for me and why!?

Financial Performance:

Burn Rate:?

This measures how much you spend a month in total and how that relates to your savings.?

You can look at this as an absolute $ figure, i.e. how much you spend on an average month or as a % of your income to showcase how much you spend, related to how much you earn each month.

Hourly Rate:

How much you earn for each hour of work is important to know, as it gives you a precise figure to use when deciding if working overtime is worth it. Plus, you can use this as a measuring stick if any new endeavour is worth your time.

You can measure this before and after tax, but the latter is a lot easier to do. You can just take your yearly salary and divide it by 2080 (or 40 hours a week) and you will have your magic number.

True Hourly Rate:?

The hourly rate also measures how much you get paid for your time after you pay all your bills and expenses. I use it to see how much I get paid per hour after all my costs to go to work.

To calculate this, I take the amount I have left for savings and investments and divide it by 160 (4 weeks work by 40 hours a week).

Savings Rate:?

It is simply the amount of money you save each month. It can be the $ value or the percentage of your income you save. Both of them will work and will give you valuable insight into your finances.

Investment Rate:?

The rate at which you invest every month is that simple!

You can also look at it as $ value and percentage of your earnings, but I would focus on the percentage. And this is because $100 might not seem a lot, but 30% is a significant achievement.

Financial Health:

Debt to Income:?

The debt-to-income ratio is super interesting as it showcases how much of your income goes towards debt repayment. So, the lower this number is, the better - for me, anything about 5% (excluding your mortgage) is too much.

Debt of Net Worth:?

The proportion of your debt compared to net worth is an interesting way to look at debt and its relationship with your wealth. The lower the ratio of debt (excluding mortgage) to your Net Worth (excluding your house), the better you are doing in life.

Emergency Fund Ratio:??

Quite straightforward, this is the number of months of “emergency" you can cover with your rainy day fund. The higher the number, the more coverage you have.

Freedom numbers

Freedom Number:

This is the amount of money you need to live from your investments and without needing to work!

This is the ideal number we all should have in mind, and for me, that is ￡2.5 million. It is not a small number, but it is not impossible to get there!?

To find out how much you need, take your average yearly spending and multiply it by 25 if you want to be optimistic or by 40 if you want to factor in any unexpected expenses. (Full article on this topic here)

Wealth Number:?

This is the newest metric for me, and it is currently fighting for the right to stay in the roaster! This is the amount of wealth needed based on current spending to cover your life until the age of 74.

Here is how to calculate it:

I am 31, so I need to cover 43 more years.

If my monthly spend is ￡2,000, that would be ￡24,000 a year.

So, if I multiply the ￡24,000 by the 43 years, I get to ￡1,032,000, which is how much I need to sustain my current lifestyle for the rest of my life. While I can probably do it with less, this is somehow obtainable number.

Emergency Fund Coverage:

This is simply a check if I have 2 years' worth of emergency funds to cover myself. While it might be a big number, it is the amount I feel is enough to enable me to sleep well and not worry too much about money.

To calculate how much you need, take your average monthly expense and multiply it by 24. In my example, that would be: ￡2,000 x 24 = ￡48,000

While I don't have that today, I am doing my best to achieve this as soon as possible!

And to be honest, all those metrics are quite easy to calculate and maintain. But you need to invest the time and learn which one makes sense for you and the stage of life you are in!?

As always, if you need any help doing so, feel free to reach out and ask, I love helping people! And in the meantime, make sure you track what matters not what makes for a good headline!

Next week, we will build a complete Financial Sheet to cover all your finances and make your life nice and easy using the KPIs from today.

Post #108 in the series CFO of Life #si #personalfinance #CFOofLife