Becoming financially successful might seem a little complicated, but it’s not too difficult with the right strategy. The most important thing you can do to become wealthy is to tracking your income and expenses.
However, total income and expense aren’t the only metrics which you should be tracking. Knowing all of your income and your expenses on a monthly basis is a great starting point. However, just tracking our expenses and income doesn’t tell us anything about the way we use money.
Are you a saver? A spendthrift?
Without digging a little deeper into the data, you won’t know whether you’re on the path to success, or if the ship is sinking.
How do you track your finances? What factors are important when it comes to personal financial success.
In this post, I will be sharing with you:
- How to calculate each of these personal finance statistics
- Why each of these metrics are important
- Why it’s important to track your personal finances
- Tools you can use to automate the calculations
Let’s get it tracking!
4 Personal Finance Statistics to Know and Calculate
There are potentially hundreds of financial metrics you could track, but there is beauty in simplicity.
The 4 metrics you need to know for personal financial success when it comes to tracking finances are:
- Net Income
- Gross Expenses
- Savings Rate
- Net Worth
Tracking your net income over time will give you a picture of what you are working with financially.
Let’s start off with an easy one: net income. What did you make in income, after taxes, for a given period?
The easiest way to do this is by just looking at a recent pay stub.
You’ll see your gross income listed out, which is what you made before taxes.
It should also list out all of your deductions, like FICA, federal, your state tax (if any), etc.
If you have investment income, or have any other freelancing or consulting income, you can find your gross income by adding up what you are paid each month.
Below gross income, if you’re looking at your pay stub, you’ll find your net income, which is the income remaining after all taxes.
Essentially, your net income is what you have to work with each month and year.
If you make $5,000 a month after taxes, then you know you have a maximum of $5,000 you can live on for all of your expenses and saving goals.
Hopefully, over time, this number will go up as you become more experienced and valuable to your clients or employer.
For me, I use income to judge how effectively I used my cash in a given period.
If I received a windfall or had a good quarter consulting, I might have a month where my income increases by $1,000 to $2,000. This sets the stage for increased contributions into savings or my investment accounts.
Tracking net income allows you to plan what to do with that income to best set yourself up for financial success.
You can’t base your financial planning on gross income (for instance, your yearly pre-tax salary number) because you will surely overestimate how much you’ll actually have to work with since taxes will be a chunk of that money you won’t see on a regular basis.
Tracking your net income allows for accurate money management.
Your total gross expenses is a very important financial statistic to calculate for yourself.
After income, calculating gross expenses – the total amount of money you spend during a month – will help you identify any weaknesses in your budget.
You can track your expenses however you find most effective. I split my expenses into some broad buckets, and then dive deeper to get a better understanding of where my cash is actually going each month.
- Discretionary Spending
- Food and Drink
- Home Improvement
- Cash Withdrawal
- Principal on Mortgage
- Interest on Mortgage
- Home Insurance
- Property Taxes
- Private Mortgage Insurance
- Auto Insurance
- Auto Loan Principal and Interest
- Other Insurance
- Health Insurance
- Dental Insurance
- Umbrella Policy
- Life Insurance
- ATM Fees
- Other random charges and fees
- Social Security
If I had kids, I can imagine having more line items for diapers, clothing, child care, sports, saving for college, etc.
Like I said, you can categorize your expenses anyway you’d like. Personal finance is personal! 🙂
For example, I lump food and drink together. Splitting them up makes sense as well, but I don’t drink as much anymore, and as a result, I simply have kept it as food and drink.
As part of your overall financial picture, tracking gross expenses can reveal areas of improvement (are you spending too much on a cable subscription when you rarely watch TV?). Over time, you can make tweaks and grow to make sure you are on the path to financial success.
Savings rate is a very important personal finance metric to track.
Once we have our income and expenses for a certain period, we can move on to a slightly more complicated metric: savings rate. No, it’s not too complicated, just some division added to the mix 🙂
A person’s savings rate is the percentage of income which a person saves in a given time period.
Simply put, it can be calculated as (net income – gross expenses) / net income.
Let’s say a person makes $5,000 in a month. They spend $2,500 of it and the rest is saved in their savings account. Then, their savings rate for the month is 50%, or ($5,000 – $2,500) / $5,000.
Now, it gets a little bit more complicated once you start to factor in contributions to investment accounts and principal payoff of debt.
For me, I don’t count these as expenses. Withcontributions to investment accounts, you aren’t giving your money to someone else, rather you are putting it somewhere else for your future self.
For paying down a debt, I do consider interest to be an expense.
At a minimum, people should aim to save at least 10% of their income. Personally, I’d suggest aiming for 25%+ to help you become wealthy more quickly.
What is your net worth?
It is your assets minus your liabilities.
What are assets?
Assets are things a person owns which have value. Typical assets include houses, cash, stocks, bonds, cars, precious metals (jewelry, etc.), currencies, businesses – and the list goes on and on.
Next, what are liabilities?
Liabilities are things a person owes, either to a bank, a financial institution, or another person or business. These include credit card balances, mortgages, auto loans, personal loans, liens – and the list here goes on and on as well.
To calculate your net worth, subtract your liabilities from your assets.
It’s great if the resulting number is positive – this means you have a positive net worth. Your assets are worth more than your liabilities! Great job!
If you have more liabilities than assets, that means you have a negative net worth. Your liabilities are greater in value than your assets.
If you have more debt than assets, there’s no sense in wallowing – it’s time to destroy that debt!
Over time, you want your net worth to be increasing. If you have a positive savings rate, then your net worth will be increasing since you will be increasing the asset side of the equation.
I focus on increasing my net worth over time. In the 3 years, I went from a negative $15,000 net worth (in college with my student loan), to a positive $125,000 net worth.
My assets include my house, my car, my cash, my IRA and 401(k), and my business. I have a mortgage, a HELOC, and 4 credit cards which I pay off faithfully in full each month.
To increase my asset base, and continue to grow my net worth, I’m focusing on contributing to my retirement accounts, paying down a little bit extra on my mortgage each month, and growing my business.
Knowing your net worth is crucial to tracking your finances. Focus on growing your net worth and you’ll be on your way to financial success.
Some Other Favorite Personal Finance Metrics
One of the great things about having blog readers is being able to ask them about their strategies for financial success. A number of people contributed when asked how they track their finances each month:
Diego, a good friend and avid The Mastermind Within reader said the following:
A steady and overachieving monthly and yearly savings rate is the key for me.
I love it – savings rate is truly a great indication of where you are!
The Grounded Engineer, a fellow blogger, says he used to compete with a friend to see who could save more:
I used to look at what other people were doing. For example, one of my best friends and I would see who’s 401(k) had the larger balance. It was fun and we are both competitive, so it worked out great because we were both saving a significant amount of money. My friend has slowly succumbed to lifestyle inflation, and hasn’t been able to keep pace. I’m trying to get him on the financial independence bandwagon, but I have been unsuccessful in my attempts.
I’ve never seen that in practice! I’m glad you have kept up with your contributions!
Cynthia, another reader and friend of mine, said:
We track net worth over time. If net worth is going up over time, we are happy.
I couldn’t have put it any better myself!
The community members agree: tracking personal finances through knowing your savings rates and tracking your net worth over time will lead to financial success.
6 Personal Finance Softwares and Tools for Millennials
Tracking your finances over time is critical for financial success.
What gets measured, gets managed.
Not everyone is a spreadsheet or Microsoft guru. Luckily, there are many softwares and tools out there to help automate and track your finances over time.
I love spreadsheets and developing new algorithms and ways to calculate and track what I’m doing in my life. Technology is something I love, and as a programmer and statistician, I’m able to play with different technologies at work every day!
There are six tools I want to highlight that are critical for your financial success. These tools range from simple spreadsheets to calculators to full blown applications:
- The Mastermind Within Income Statement Spreadsheet and Debt Destruction Tool
- Personal Capital
- Mad Fientist Financial Independence Calculator
- Financial Mentor’s Calculator
- Different Personal Finance Blogger’s Spreadsheets and Tools
The Mastermind Within Income Statement Spreadsheet and Debt Destruction Tool
Destroying your debt and tracking your income and expenses over time are two great ways to get on the path to wealth.
Luckily, I’ve come up with two FREE tools for you to use and play with to improve your finances!
I hate debt, but I love programming. That’s why I wrote some code in Excel and came up with a calculator which, after you input your debts and a simple budget, you can see how much interest you will save using the snowball and avalanche debt pay off methods.
If you are looking to get rid of your debts, you should definitely check it out here: The Mastermind Within Debt Destruction Tool
For tracking my income and expenses, I use an income statement spreadsheet I created. Each month, I pull in my transactions through Mint, and then categorize these transactions. After I’ve categorized everything, I get to see exactly where my spending and income lands each month.
Check it out here: The Mastermind Within Personal Finance Income Statement
In 2019, I want to turn these into full blown web applications. I think that would be super awesome… but I need to learn a little bit more on the web development side of things!
The pinnacle of free web and mobile applications, Mint is at the front of everyone’s mind. I love it because I can input 95% of my accounts, and it allows me to see my net worth in real time.
With Mint, you are able to connect all of your bank accounts, retirement accounts, debt accounts, and see all of the balances and information in a neat and tidy fashion.
I use Mint in tandem with my personal income statement spreadsheet. Mint is a great starter application for people who are looking to get their finances in order.
Tracking your investments over time can be a struggle. You sell a little bit of this stock, and buy some of that bond. We aren’t all programmers and developers, and can’t track our profit and loss and portfolio value over time easily. That’s where Personal Capital comes in.
Personal Capital is like Mint, but has much greater capability for tracking investments over time.
With Personal Capital, you will be able to see your exposure to different asset classes, as well as get your income and expenses over time.
Personal Capital is a great tool to add to your finance tracking portfolio.
Mad Fientist Financial Independence Laboratory
How far are you away from financial independence? With the Mad Fientist Financial Independence Laboratory, you can know right now!
This web application allows you to enter in your monthly financial data and it automatically charts your progress to FI. It’s an easy to use and cool application.
In addition to being able to use your current expenses, you can forecast using your future expenses to see what financial independence will look like.
Check it out here: Mad Fientist Laboratory.
Financial Mentor has eighty financial planning and personal finance calculators on their site.
Eighty! That’s insane. Many of these are pretty simple, but it’s still pretty cool to see all of them in one spot. Plus, they are free!
Hopefully there is one for you. Check these calculators out here: Financial Mentor Calculators.
Other Bloggers Spreadsheets and Tools
Since I started blogging, I’ve seen a number of bloggers posting their own spreadsheets and tools. I love seeing what other people have created, as there are many, many smart people in the world, and everyone has a unique take on life.
Three bloggers that have tools I’ve been recently using are Life and My Finances, Physician on FIRE and ChooseFI.
Derek from Life and My Finances, has a collection of spreadsheets, all for free! I actually ended up drawing inspiration for my Debt Destruction tool from Derek’s debt snowball calculator! Check him out here: Life and My Finances.
Physician on FIRE has a great spreadsheet as well. As a doctor, he knows a thing or two about finance as well! Check him out here: Physician on FIRE.
Finally, the ChooseFI Vault has a great wealth of information. If you love their podcast, then you’ll definitely want to check out the vault here: ChooseFI Vault.
The Importance of Tracking Your Personal Finances
Tracking your personal finances and knowing where you are financially is so important to financial success.
I have two friends: Jack and Jill. Jill tracks her income and expenses, and Jack doesn’t track his income and expenses.
Jack and Jill work at the same company and are in the same team, both making $5,000 a month.
Jill, the Tracker
Jill, the tracker, wants to retire someday, and a few years ago, she started putting away $500 a month into an investment account. Now, she is married and just gave birth to her first kid. As a result, her expenses have gone up but she still has kept in mind this goal of saving for retirement.
Before having her child, she was spending $500 a month on food and drink with her husband. Now, since they have another mouth to feed, she realized that their combined food spending would about $750 a month if she kept eating out. Instead, she changed her habits and started bringing her lunch from home a few days a week.
With this simple change, and even with an extra mouth to feed, Jill is still only spending $500 a month on food, did not alter her lifestyle too much, and is still on track for retirement.
Jack, the Non-Tracker
Jack, the non-tracker, wants to retire soon, but doesn’t know where he is at on a monthly basis. He puts $500 into his retirement account because he heard that it was a good idea on some radio show. In addition to this, he has been saving on average a few hundred dollars a month in cash which he adds to one of his investment accounts here and there.
Recently, he got married as well, and recently gave birth with his wife to a newborn. His expenses have increased, but he is not really sure how much.
One of the things he loves is watching football, and in particular, going to games at the local stadium. Even with his newborn, he still wants to go to games.
With the increased expense of having a kid, his cash savings goes to 0, and now he isn’t getting those additional savings.
A few months later, he realizes he can’t make his usual investment account contribution and is a little puzzled, “oh well, I guess we just bought a few more diapers than I thought, I’ll make the investment next month.”
His next investment is never made because he has no idea how much cash he is saving each month.
Who’s going to be more successful in the long run?
Who is going to be more successful financially in the long run? Jack, the non-tracker, or Jill, the tracker?
I’m going to guess Jill is going to be more successful financially.
She knows exactly where her money is going at the end of the day. Jack on the other hand does not.
I hope this example helps paint a picture of why it’s important to track your income and expenses over time.
You never know when life is going to rear it’s ugly head and throw some unexpected expenses at you – but with proper tracking, you can navigate these rough roads much easier!
Grow Wealth Over Time Through Tracking and Consistency
Keeping track of how you are doing financially WILL lead to personal finance success.
With these four metrics in hand, you will be ready to take on the world of personal finance. Tracking your income and expenses, savings rate, and net worth over time will help you understand where you are financially, what you can improve on, and how to take action.
Calculating these ratios and metrics are not difficult – basic addition, multiplication and division will suffice.
With these tools in your financial toolbox, I know you’ll be well on your way on achieving your financial goals and dreams.