How do you know if you are on the right path financially or not? There are so many metrics and benchmarks to consider; income, net worth, home equity, spending, investment balances and on and on.
In fact, there is so much data at your disposal these days you can easily get lost in the thicket. If you do, you run the real risk of focusing on the wrong things. And if you do that you could miss the really important stuff and thereby waste a lot of time and a lot of money. Who needs that? Nobody.
So how do you know if you are on track or not? Fortunately, it’s not all that difficult. In fact, it’s really simple. I divide this exercise into those things you need to track monthly and those things you need to track less frequently.
The Monthly Information You Need To Track
Every month you should know how much you spend to support yourself and your family. I don’t care if you are a college student or a retiree. If you want to be free of financial worry and know that you are doing OK, you need to know what you spend on average to live. And the only way to calculate your monthly average is to track the monthly amount and feed that into the calculation.
If you want to track everything you spend money on you can do that. It might help you cut expenses if that’s what you need to do. But what’s most important is to track what it costs you to live on average each month and make sure you are living within your means. As I’ve discussed several times before, this is not a very time consuming exercise and well worth it.
But without knowing what it costs you to live you can’t estimate what it’s going to cost you to live in the future. And if you can’t estimate what it will cost you to live in the future you have no idea if you are saving or investing enough in order to afford that life.
So if you want to know if you are on track, start by recording your average spending amigos.
The other crucial bit of information you need is your monthly saving and investing amount. Presumably, you’ve run a financial plan and know how much you need to save in order to achieve your goals. Track how much you save and invest (including retirement plan contributions) each month. If you are hitting your goal, great. If not, find out why. If you need to cut spending in order to reach your objective you may decide to do that. If you determine that you aren’t able to save the amount your plan calls for, re-run the plan and come up with an alternative scenario. Either way, track the amount you actually put away each month.
Spending and savings are the two crucial items you need to track every month. Enough said.
Less Frequent Benchmarks
It’s important to look at your assets at different times to confirm that your current holdings are most appropriate. Consider your home value first. It’s smart to compare your current home values, costs and appreciation rates to alternative areas.
But this isn’t something you do every month. It depends on your situation of course, but if you think this through even once every couple of years, you’re probably ahead of the curve.
It’s also important to review your investment statements and account values. But even if your investments drop in value or fail to grow at the rate you expected, it doesn’t mean it’s time to cash in.
Consider the market, your willingness to accept risk, your goals and how other competing investments did. It could be time to make a change – but it can be costly to move too quickly. Evaluate your investment approach carefully over an extended period before making a big shift.
It’s also helpful to track your net worth. But again, this is a little less important on a monthly basis. Keep in mind that net worth is just a compilation of what you can control (spending and savings) together with what I have limited control over (asset values).
It’s smart to check yourself and live your financial life on purpose. You do that by first crafting a good solid plan and then make sure you implement it by carefully tracking your average monthly spending and making sure you save the required amount each month. Then, periodically, look at the big picture and make sure you are managing your assets in the best possible way.
Are you on track financially? How do you know?