Monday, 8 August 2016

Financial Basics 13 - Tracking your Financial Performance

When you decide that you want to track how something is performing, usually this is done by measuring something actual and comparing against a target. An Athlete's performance is measured by such things as time, distance, height or score. But what do they measure against? In their competitions they are trying to get the fastest time, longest distance, lowest or highest score depending on the sport. In training and warm-up competitions they may be measuring their performance against something else. They may have a target time they want to achieve, or maybe they just want to continually improve over their personal best time.

So when you want to measure your performance your need to:
  • Decide on what you are measuring.
  • Decide on what targets or progression are considered success.
The simplest form in term of finances is to measure your Net Worth and compare it to a target amount that you want to achieve. 

A more sophisticated approach is if you are creating a forecast of net worth vs time, which you can do using my Retirement Forecaster spreadsheet, you can compare your actual net worth versus the forecasts you have created in the past. This method has not only the benefit of measuring your net worth performance, which is made up of your savings rate and your investment performance, but also the quality of the forecasts you have created in the past. 

Net worth is not the only metric you can use to measure your savings and investment performance, however it is one of the most important. A common guideline is that you will use a 4% withdrawal rate when you retire, which means that if you have retirement expenses of $50,000 per year then you will need $1,250,000 ($50,000 / 0.04) in total retirement assets to be able to fund this expense. 

This and other metrics you could monitor are listed here:
  • Net worth: This is the sum of the value of all your assets, both physical and investment, plus cash less any liabilities such as mortages and credit card balances.
  • Retirement Assets: This may be the same as your Net worth, but may be less. If you are not planning on using your house asset to fund your retirement, then you should not include it in your  retirement assets. Other assets, that depreciate and do not create any income should also be excluded, such as cars and boats. 
  • Savings Rate: This is the amount you save while you are employed. Your target could be a % or an amount.
  • Expenses: Otherwise known as a budget. It is important to know how much you spend to know how much you can save. Knowing where you spend your money will help you reduce it and help you create future budgets such as how your spending will change in retirement.
  • Investment Performance: How your investments are doing. How much income they create and overall return on investment. 
Net Worth is certainly one of the most important, supported by the fact that many bloggers report this as a public measure of their performance. Are they bragging? Not likely, as most of them publish this to keep their personal focus on their savings and investing performance.

At Rockstar Finance there is a list of over 200 bloggers who track Net Worth.

Some bloggers do measure and publish other metrics. Here are some of those.
I do recommend that as a minimum you track the following:
  • Net Worth
  • Retirement Assets
  • Amount saved.
  • Overall investment performance.
I have create a simple spreadsheet to make tracking all of this easy. It also allows you to compare actual performance to the forecasts created in the Retirement Forecaster spreadsheet.

See my post entitled Net Worth Tracking Spreadsheet for more details and a to download a copy of it. 

Disclaimer:  These posts are not fully comprehensive financial advice.  You should seek your own qualified investment, tax and legal advice.

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