8 Key Personal Finance Metrics You Need to Track

If you are wondering what to track, here are key personal finance metrics to gauge your progress and keep you on track. 

Personal Finance Metrics are a great way to track the progress of success in your personal finance plans. These metrics are easy to apply and point you to the key areas that need work and improve your overall financial health.  So, if you are making that journey towards Financial Independence, you’ll need to track and improve these key performance metrics in order to become financially independent. 

Here are eight (8) key personal finance metrics you should track to make sure that your overall financial health is getting better, and not worse over time.  

1. Savings Rate

How much do you set aside from your income?

Savings are the foundation of building wealth. The rate at which you save is the amount that is left after all expenses are paid and are expressed as a percentage of left-over income after expenses divided by income. The benchmark rate we use as financial planners for savings is between 10 – 15%, or higher if you are closer to retirement and have nothing to your name. 

It is important to know and understand your savings rate because it will help you along when achieving your financial goals. You may realize along the way that you need to cut expenses and/or increase your income to reach your goals. 

2. Passive Income 

What percentages of expenses are covered by passive income?

Passive income is the income that is earned with little to no effort to earn and maintain. There are various types of passive income out there such as rental income, dividends or interest income. The aim of anyone looking to build a substantial amount of passive income is to cover and exceed expenses. To do this one has to consistently save more money and put it work. 

So, If you have KES. 100,000 a month in expenses and you have a couple of rental properties that bring in a total of about $50,000 per month, then your passive income ratio would be KES. 50,000/100,000 = 50%. The aim now would be to push this metric to 100% or more i.e. cover all expenses and move closer to financial independence. 

3. Financial Independence Number

What amount of savings do you need to accumulate to be financially independent? 

The Financial Independence (FI) Number is the amount of net worth you need to have accumulated before you declare yourself financially independent. One is considered financially independent when they have enough savings and passive income to cover their expenses for life. 

Your FI Number is typically 25 times your running expenses. It should be more than enough to withdraw 4% (inflation-adjusted) every year to cover your expenses forever without depleting your initial reserve. This means it should be well invested to make returns that ensure that the asset is maintained forever. 

4. Financial Independence Ratio

How close are you to being financially independent? 

The Financial Independence (FI) ratio shows you how far or how close you are to being financially independent. This number is very easy to compute. You simply divide your Net Worth by your FI Number, which will give you the percentage of your progress towards Financial Independence. 

For instance, if your FI number is KES 15M and your Net Worth is at KES 3M, your FI Ratio will be 20%. That means that you are 20% close/far to your destination i.e. being financially independent.

With this information, you can decide to increase your FI ratio either by increasing your Net Worth or by reducing your FI Number. To increase your Net Worth you would need to save more money or increase your income. And to reduce your FI Number, you would need to spend less money or increase your passive income to cover your expenses. 

5. Emergency Capacity

How well are you equipped to deal with emergency money issues? 

It isn’t uncommon to find people calling everyone they know asking for money to cover unexpected expenses that may arise from losing your job suddenly, accident medical bills, bribes to get out of police situations etc. We typically advise to have an emergency fund to cover these expenses, however, there are other ways to ensure that you have access to funds in the event of an unexpected expense. 

Before you sell your car, bonds, shares etc. consider the limits on your credit cards or M-shwari for instance. Adding up, your sources of funds i.e. your credit card limit, mobile money app limits, emergency funds and cash, constitutes your Emergency Capacity.

6. Net Worth

How much are you worth?

Net worth is what are all aiming to build, and the Net Worth metrics serves as an indicator of financial health. It is computed by subtracting your total liabilities from your total assets.

The goal of knowing and tracking your net worth is to consistently grow it over time. This can be achieved by increasing your assets, decreasing your debt or both. 

7. Target Net Worth 

If you aren’t comfortable taking a stab in the dark and would like a metrics to benchmark how you are doing, then consider this:

Your target net worth provides a great indication of what you should be worth after liabilities. 

For instance, If your annual pretax income is KES. 960,000 and you are 30 years old, your net worth should be KES. 2.88M.

To get this, you compute your annual pretax income, divide it by 10 and then multiply it by your age.

Please note that this metric is simply to give you a context of what could be achieved given your current financial standing. However, at the end of the day, let’s aim for higher, bigger and better. Right? 

8. Debt Income Ratio

The Debt to Income ratio is a great way to keep track of your progress of paying down your debt. It is a percentage of your total monthly debt payments divided by your monthly gross income.

For instance, if your total monthly debt payments are KES. 15,000 and your gross monthly income is KES. 50,000, then your debt to income ratio is 30%. A Debt to Income ratio lower than 30% is always ideal, which translates to a better credit score. Financers, always consider your credit score and this ratio before lending any money. 

The aim of this ratio is to ensure that you consistently lower this percentage month to month. Should it increase, you’ll be aware and you will take the necessary actions to get it back down. 

In A Nutshell

Here is a summary of the personal-finance metrics covered here: 

Building Wealth Using These Metrics:

There are so many personal finance metrics that everyone should be aware of, to help keep track of their personal finances. However, if you are trying to become financially independent and be more purposeful in your financial planning, then consider adopting these metrics when tracking. 

To use these metrics, I recommend using a spreadsheet tool to help you keep track of it all. Just put all your numbers and metrics there, and as time progress and goals get met, your metrics evolve with them over time as well. If you find this a bit too much, try out our Wealth Architects Excel Worksheets which has everything in one nice spreadsheet. 

You got this!!

If you have any questions on your own personal financial situation or need help getting started, feel free to send me an email at [email protected].

Image Credits: Top by Prateek Katyal via Pexels. 

See Also:

• Buy!! The Financial Planning Workbook
• Buy!!  The Financial Planner – Excel Template
• How to Calculate Your Financial Independence Number
• 8 Financial Planning Rules of Thumb You Need To Know
• How Much of Your Pay Should You Really Save?
• 6 Keys to Successfully Manage Your Personal Finance
• How to Develop A Simple Retirement Plan