﻿Businesses pay close attention to Key Performance Indicators. Also known as KPIs. They help the
business owner how well or not well the business is doing. Cash Flow reports help them to see if
they have enough money to pay their vendors. The Balance Sheet allows them to compare their assets
vs. liabilities. And most importantly, their Profit and loss statement shows if their
business is making money. Or not. Hi, if you are new to the channel, my name is Tae from Financial
Tortoise - a channel dedicated to helping the Sandwich Generation Master Money and achieve
Financial Security. Key Performance Indicators allow business owners to best understand their
business. In the same way, I believe similar KPIs can help us best understand our personal finances,
and most importantly, enable us to make the best financial decisions. Peter Drucker is famous for
saying “What gets measured gets managed” When we know what our savings rate is,
we can determine if we want to throttle that number up. Or slow it down because you can’t
stand eating beans and rice every night. Or if you have outstanding debt you want to pay off.
Having a clear understanding of the amount outstanding can allow you to
track your progress. When my wife and I were paying down our $105,000 of student loans,
I had a very detailed excel sheet where I would show how much we owed in relation to how much we
paid down each month. Seeing the percentage debt remaining go down from 75% to 74%,
was I have to admit, quite motivating. So in this video, I want to review 5 personal KPIs you can
track regularly to help you reach your financial goals. Number 1 on our list is Net Worth. At a
high level, your net worth is calculated by adding up your assets and subtracting your liabilities;
essentially your debt. A simple way to think about it is this. If you were to sell everything
you owned, stocks, home, cars etc. And paid off all your outstanding debt, at the end how much
cash would you have remaining? The amount of cash remaining is essentially your total Net Worth. And
this number is really the true value of your real wealth. Unfortunately, when people hear wealth,
most people automatically think about income. How much does he make? Oh wow $300,000. He’s rich.
But income is just one piece of the story and if you really want to understand someone’s wealth,
you have to look at their total net worth. There are countless stories of people who
make high incomes, yet when you look at their net worth, they are actually ridiculously poor
because of how much debt they have in relation to their assets. If you grew up in the 90s, you
should be familiar with MC Hammer. MC Hammer was one of the hottest rappers in the 90s when I was
growing up. With amazing hits, at the peak of his career, he was earning up to $70 million annually.
But without good money management habits, he spent it all on ridiculous luxury items. At one point,
he owned 17 luxury cars, a private jet, 2 helicopters and 21 race horses. You can probably
guess where this led him to. In 1996, he filed for bankruptcy with over $13 million in debt. Within
just a few years MC Hammer went from earning $70 million dollars annually to being broke with $13
million in debt. This is why tracking our net worth is so important. Earning is just one side
of the equation. Making a lot of money doesn’t automatically make you rich. It’s keeping it,
that will. And net worth is the ultimate KPI that will show how you are performing. If you
don’t like manually calculating your net worth, there are online softwares like Personal Capital
or Mint that will do it automatically for you. You just need to input the account information
for all the investment assets you own as well as other assets you own like your property or cars.
And make sure not to forget your debt. There is no specific target here. Higher your net
worth the better. When my wife and I started our debt paydown journey over 10 years ago, our net
worth was actually negative. However, overtime. But meticulously tracking it month after month,
it really motivated us to increase this number; either by increasing our investments and reducing
our liabilities. Number two on our list of personal KPIs to track is Monthly Spending Trends.
It is just what it sounds like. What is your total monthly spending and how is it performing compared
to last month or last year? When I speak to people about their personal finances for the first time,
most often they want to jump to sexy topics like investing or real estate. But the reality is,
your spending behavior has a much bigger impact on your financial life than any investment ever will.
Just like our example of Mr. MC Hammer. You can be making $70 million dollars a year,
but if your spending isn’t under control, you can still be broke. If you never had a budget or
monitored your spending before, I would recommend meticulously tracking all your spending every
month for at least 3 months. This would include everything from your home mortgage, insurance
payments to discretionary spending like food and entertainment. It could surprise you how much
you spend on eating out. Or it might not. The key is to get a good grasp of your spending pattern.
How much does your monthly lifestyle cost? Is it reasonable in relation to how much you make? Or
are you not comfortable with it If so, what is the target you want to hit? Let’s say you want
your monthly average expenses to be no more than $8,000 monthly when you add everything up. But
your spending trend shows that you are closer to $10,000 monthly. This is good,
because now you have real data you can work with to change your behavior. My wife and I still do
this at least several times throughout the year. We find something new almost every time. For
example, a subscription service that we weren’t using. Or realizing how much we were spending
on gas every month. And if you’d like additional resources to help you better manage your finances,
go to my website at financialtortoise.com and download your free copy of “Sandwich Generation’s
Guide to Financial Security - 10 Steps to Securing Your Family’s Financial Future!” I’ll also have
a link in the description below. Number three on our list is Savings Rate. Simply, it is the
percentage of your income that you are able to either save in your savings account or invest in
assets. When you can manage your expenses well, this is the other side of the formula you can
really start increasing. Once my wife and I had paid off our student loans, this was the next key
performance indicator we really monitored closely. If paying down $105,000 of student loans taught us
one thing well, it was to really manage our expenses. Every month we were juicing out
every penny we could from our budget to pay down our student loans. Once that debt was paid off,
we were able to shift that extra money to our savings and investments. And so whereas before
it was “how much can be put towards our debt” the new game became “how much can we save and invest.”
And the savings rate gave us a clear picture of our performance. Once I knew how much we needed
for our baseline expenses, we were able to dial up our savings rate every year with our increasing
salaries. Our savings rate ranged from 10% to at one point even 50% of our income. It wasn’t easy,
but having a clear metric really motivated us to push towards improving that number. Number 4 is
debt. And this is especially relevant if you have outstanding debt that you really want to pay off.
If you have student loans, car loans or any other higher interest debt, you want to pay it off as
quickly as possible. And the way to do that is by having a clear picture of how much you owe,
at what interest rate and to whom. When we were paying down our student loans, I had a very
detailed spreadsheet that showed each student loan amount and the interest rate. Every time
one was paid off, I would cross it off from the list and celebrate with my wife. Of course without
spending any money. If you are debating if you should pay off some of the debt you have because
the interest rates are so low. For example, like your home mortgage, I’m going to borrow
a chapter from JL Collin’s book - The Simple Path to Wealth. JL recommends the following:
Less than 3%, pay it off slowly and route the money to your investments instead. Between 3-5%,
do whatever feels most comfortable: Either put the money to debt payment or investments. More
than 5%, pay it off ASAP. You’ll need to decide what’s best for you. For my wife and I personally,
we decided to pay off all our outstanding debt regardless of the interest rate
except our home mortgage. I also have a specific video regarding how to pay off debt quickly and
efficiently you can check out here. Number 5 on our list is Credit Score. When I speak to people
about personal finance for the first time, for some reason, this is one indicator many people
like to discuss. What is interesting is that they could be under $100,000 of student debt
and have no idea what their monthly expenses are, but they are immensely proud of their
credit score. And this isn’t completely their fault. The financial industry has done a great
job of marketing the crucial importance of Credit Score. And I believe it is important,
but of all the metrics that we just reviewed, I would actually dare to say it is the least
important of them all. A good credit score will allow you to get favorable terms when
you are shopping for a mortgage or applying for credit cards. However, don’t get too obsessed
over it. When you have a good credit score, you are just signaling that you are a good candidate
for banks and financial institutions to target for their debt related products. That said,
if you are responsible with your payments and are not maxing out your credit card every month,
you will likely have a good score. You want to target at least above 700. 850 is the max. I would
recommend using free services like Credit Karma to keep track of your credit score on a regular
basis. If you want to learn more specifically about improving your credit score, I go more
in depth here in this video here. Thank you guys for watching and I’ll see you in the next one.