A lot of personal finance blogs talk about how to make financial progress. How to save more, earn more. How to invest and or pay off debt.
All that is good. But how do we measure progress?
Here are a few ways that we do it. I’m sure there are many others. If you’re reading this feel free to share in the comments.
1.) Operating Income – This is the income that is left over after expenses. We measure it on a total dollar amount and as a %. Over the past few years our goal has been to get to 50%. Last year we budgeted to get to 49.78% and we got to 48.59%.
This year, I’m projecting that we’ll come in at 50.8%. It’s a little bit short of our budgeted 51.86%, but I had a much smaller bonus than expected, so it’s amazing that we’re evening coming close.
This measure is important because it measures how well we’re both increasing income and decreasing expenses. If our expenses are increasing at the same rate as our income, then this amount stays the same. But if the operating income percentage is increasing, then we’re doing better.
The other reason this is important is because it puts in clear focus how much of our income we have to work with to use on the balance sheet to pay off debt or invest in income producing assets.
2.) Net Assets – This is measured as assets minus liabilities. It is the standard measure of true wealth. A lot of people might have high incomes, but if they have high debt or low assets, they can have little or no “true wealth”.
But how do we measure whether we’re doing a good job on net assets. I’ve thought about this a little bit and there are two ways that I look at this.
A.) Year-over-Year growth – This should always be increasing to growth wealth. Especially during the working years where it’s growing based on contributions/asset purchases as well as earnings from those assets. Later on, during retirement, it might only grow (or maintain) from the earnings.
As of Oct 31, 2016, our net assets have increased by 34.6% from this point last year. This is partially due to reducing our debt by 15% and increasing our investments by 25%.
B.) Allocation – Assets should be good assets and liabilities should be good ones (if any). This is a broader subject, but a good asset appreciates and/or produces cash flow. Preferably both. For instance, we show our house as a huge percent of our assets because it has appreciated so much. But it doesn’t produce cash flow, so it’s a semi-good asset. I would much rather it be in assets that appreciate AND cash flow. Such as rentals.
And when it comes to debt, I’m pretty much against all of it, but particularly consumer, car, and student loan debt. But if we have any debt, it should be on income producing assets at a low LTV (Loan To Value) ratio.
One of my pet peeves is how many credit card adds personal finance blogs put on their sites. I realize that they may have achieved a measure of financial discipline, but their readers might just be starting out and another credit card is the last thing they need.
I’ve been on some financial blogging discussion boards where the most discussed topic is how to entice readers with credit card adds. Yikes!
3.) % Towards Retirement Amount
To be clear, I don’t see myself as ever retiring, but it’s good to have a goal. I measure my retirement goal amount as 30 times our annual discretionary expenses. And as our discretionary expenses go up, this amount unfortunately goes up too.
Right now, I put us at 9.14% towards that goal. At this point last year, we were about 6%. So, this one is going up maddeningly slowly. But it’s one I keep an eye on.
4.) Tithing amount
This is really important. We aim to tithe at least 10% of our income and often go over that. I’m projecting that we’ll be at a little over 11% this year.
We calculate it as 10% of gross income minus taxes. We don’t take out anything like health insurance or IRA contributions because we believe the one item we don’t have a choice in is the taxes. So the amount that we have discretion over is the “gross minus taxes” amount. It makes our tithing amount a lot bigger, but we believe it’s the right thing to do.
Our method is to transfer the money to two separate accounts. One for my wife and one for myself. We have our favorite organizations to give to, but we can also choose to let some of it accumulate. That way we can give extra to people or special causes that we hear about. The regular transfer gives us the discipline to set it aside and the accumulation gives us the freedom to choose where to give it.