I recently read an interesting Forbes article about measuring success. I will summarize below and include a link at the bottom of the post. I confess I like any tool that measures your progress towards your financial freedom. I believe these 6 check-points are useful references to challenge the status quo.
If you always give what you always gave then you’ll always get what you always got
In finances, you aren’t competing against your neighbor or your co-worker; you are competing against yourself! Are you making progress toward your goal of financial independence? Or are you getting in your own way? Let’s walk through the 6 steps and see if there are any areas you need to work on.
- Your net worth. The article suggests you check this once a year. Write this down and see how you are doing from year-to-year? Is your net worth going up or down? Remember that net worth is everything you own (e.g. house, 401k, etc.), subtracting everything you owe (e.g., mortgage, student loans, credit cards, etc.).
When your outflow exceeds your inflow then your up-keep is your down-fall.
- Your credit score. An excellent credit score will result in a lower interest rate and that can make a big difference. A 4% 30 year mortgage on a $300,000 house would have over $215,000 in interest over 30 years! (a 15 year mortgage would have less than $100,000 in interest, but that’s a topic for another day); that same 30 year mortgage would include about $280,000 in interest at 5%. Going from 4% to 5% on the mortgage will cost you an extra $65,000! (for the same house. . .) A good credit score is an indication of paying your bills on time and being conscientious to pay-off your debt. I would rather you not had debt at all (other than a 15 year mortgage), but if you already have debt, don’t neglect your credit score and end up paying more in interest. . . The article suggests a very good score is 740 (and higher).
- The number of months your emergency fund will carry you. Most financial planners suggest 3-6 months worth of expenses be saved in a savings account (not stocks, bonds, CDs etc.) What would happen if you lost your job or had another financial emergency (examples include medical emergencies and necessary home repairs (e.g., a leaky roof). What would happen if you lost your job tomorrow? Would this involve lots of credit card debt. . .
- Your retirement saving percentage. Millionaires on average invest at least 20% of their income, according to the Millionaire next door book by Thomas Stanley. This article suggests you start with 10% to retirement, 5% to an emergency fund, and 5% for other goals.
- Your debt-to-income ratio. To calculate your debt-to-income ratio, take the total of your monthly debt payments (e.g., car payments, student loans, etc.) and divide it by your gross monthly income (for the month). It’s optimal to be debt-free, of course, but according to bankrate.com, lenders look for a target debt-to-income ratio of 36% or less. What’s yours?
- Your giving percentage. Personally, I believe a true measure of personal financial security is the ability to give. I don’t just say that as a Christian (Christ was a giver, John 3:16, just sayin’). Giving will change your perspective on life – I promise. Remember, its not about you (purpose driven life book). Research even indicates that giving to others makes us happier than spending money on ourselves. I am a Christian so I believe this percentage should be at least 10% – the Bible tells us not to steal from God.
As you improve and grow your wealth, it will be rewarding to look back and see how far you’ve come.