What Metrics Matter for Financial Success?

Last week, our net worth in Mint crossed $100,000. When we were paying down my student loan debt six years ago, I tracked our net worth meticulously. I was elated when it finally climbed out of the negatives. Then, it felt like it crept up ever so slowly, languishing in the $20,000 range forever. I was desperate to see it grow larger.

So why was my reaction to a much larger number simply to think, “Oh, that’s nice,” fire off a quick tweet, and go about my day with nary a snake hips gif?

Back then, I think I valued our net worth so highly because it was a sign that we were building something. Paying down debt is just that–watching a number decrease. Intellectually, you know you’re making headway every time you mail in a loan check, but it’s psychologically much more appealing to watch a number go up rather than down.

I also think that net worth mattered more then because, as a young adult new to managing money, I somewhat equated the state of my net worth with personal worth, or at least with my success at “adulting.” It was hard not to feel kind of worthless on a whole when our net worth was negative. I would never equate someone else’s value to their net worth, but I’d be lying if I said it didn’t bother me back then.

So What Changed?

Our goals.

Trying to get our net worth into the positive was really motivating when we had debt and a low net worth. Now that we’ve been debt-free for a couple of years and our net worth is firmly in the positive, the number is less exciting. I think that is because net worth is no longer an accurate measure of our goals.

The main way we intend to grow our money is with investments. We don’t want to go into real estate, or buy any other fancy big ticket items. We do own some larger items, like our cars and our house, but those items are not investments to us. They are utility objects, providing our transport and shelter. The cars have mostly finished their deprecation descent, and we intend to drive them until the wheels fall off. The house serves as a hedge against inflation, but we don’t expect to make a ton of money on it. We intend to live in it.

For us, then, net worth isn’t a very motivating measure anymore, because all it really comprises is our investment portfolio plus a few bigger-ticket utility objects. Better to simply cut out the fluff and use the amount in our investment portfolio as our yardstick, since that number determines when we will be financially independent.

So What is a Good Financial Metric?

All of this has me thinking, “What is a good metric for measuring financial success?” I think it needs to encompass a few things:

  1. Your metric needs to keep you honest. Any metric that lets you finagle numbers so that you can lie about the status of your finances is, um, not good. This usually happens when the metrics become convoluted. Net worth and portfolio size are fairly simple metrics to figure out. If you’ve having to bend over backwards with crazy formulas to prove your point, something is probably wrong.
  2. Your metric needs to motivate you. Whatever the metric, it needs to be motivating. Net worth used to be motivating for us. Now that our net worth is positive and should continue to grow for the foreseeable future, it is less motivating. Now investment portfolio size is more motivating, so we’re going to start measuring our financial success with that metric.
  3. Your metric needs to reflect your goals. Using your investment portfolio as the way you’ll measure you financial success if you’re a real estate investor is going to be  disheartening and inaccurate. The metric you use should show your progress in achieving your financial goals.

Have any of you ever found you were using a financial metric that did not really match your goals? What are some of the creative metrics you’ve come up with to keep you motivated?

One Reply to “What Metrics Matter for Financial Success?”

  1. Debbie M

    Oh, so many motivating metrics! My favorite was keeping track of my house pay-off date (as well as principal still owed). Now that my house is paid off, that metric is less motivating for some reason. 🙂

    I also like to graph various categories of spending. It’s fun to get groceries down to $100 per month (for one not very large person). Keeping track of transportation expenses helps me know what it really costs to own a car.

    Most of my investment money is in index funds. So comparing 4% of that to my annual expenditures is motivating (showing me how much of my expenses could be covered by smallish withdrawals). That’s probably my most motivating metric these days.

    Some of my money is in dividend growth stocks. Tracking the average monthly dividend payment is also motivating. It could motivate me to get high-dividend high-risk stock, but I’m not doing that. Whew! Mostly it’s motivating me to keep reinvesting the dividends, buy more stock when I have money, and sell stocks that cut their dividends.

    And I still make sure my checking account balance stays positive. In college, that was probably my best metric.

    I do track net worth, but don’t find it very motivating. I’m in a high-property-tax state, so when the value of my house rises, that’s actually bad. And stocks are kind of random, so the value has very little to do with me these days. As my car depreciates (at a slower and slower rate), my savings for my next car rises (at a constant rate, adjusted for inflation).

    There are probably more metrics I’m forgetting.

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