Use financial metrics to track your financial health. From net worth and liquidity to capacity and debt to income ratio.

Financial Metrics – Tracking Personal Finance Health

I work in the supply chain field. My office is a warehouse. In that line of work, I am constantly focused on improvement. Trying to squeeze out cost savings over time. The methods for tracking that improvement come in many names, including continuous improvement, Six Sigma, lean, kaizen, and more.

Along with all of those methods for improvement come different metrics. In a warehouse I might track metrics like orders picked per hour, inventory accuracy by location, or inventory turns of items. All of those numbers tell me something and I can track them over time to find trends. Those trends inform me on the overall health of my supply chain operation.

Regardless of what you call it, improvement only comes when we measure something. If I don’t track productivity in my warehouse, how do I know whether we get better or worse from month to month?

The same holds true for personal finances. I need to track metrics in my finances, which lead to trends over time, which tell me my financial health.

Now, the trick is finding which financial metrics to track.

Which Financial Metrics to Use?

I have to be honest…I haven’t tracked any personal financial metrics…ever. Well, I have tracked my stock investments, but not metrics related to my financial health. I have no idea which are the important ones and which are useless. So, like any person with a question, I went to Google for some answers. I didn’t search long and hard, but I came up with two articles that seemed to have a few answers and some similarities.

The first article came from Money, a well-known magazine. Seems reputable enough for this endeavor. The next article came from a website called NDTV Profit, and I know nothing about them. However, the information in the article seemed solid enough.

Here are the financial metrics they recommend to track:

Money – 5 Financial Numbers You Should Know Off the Top of Your Head

• Capacity
• Debt-to-Income Ratio
• Liquidity Ratio
• Net Worth

I like the simplicity of these metrics. They are rather easy to understand and calculate. One thing I didn’t like about the Money article is that they did a poor job of explaining exactly how to calculate the metrics. I had to do some extra Googling to find the “how” on these metrics.

NDTV Profit – 7 Ratios Which Will Reveal Your Current Financial Health

• Liquidity Ratio
• Asset-to-Debt Ratio
• Current Ratio
• Debt Service Ratio
• Saving Ratio
• Solvency Ratio
• Investment Assets to Total Assets

There were similarities in these metrics. I like that the NDTV article gave details on how to calculate these ratios so I didn’t have to go searching for more details and definitions. I didn’t like the ratios themselves, though. They seem either too in depth or overlapped with other metrics. Even after reading the article a couple times, I still don’t know whether I need to track these metrics or what they tell me.

What Am I Going to Track?

Since the metrics from NDTV seemed to overlap, I decided to go with the list from Money. I’m going to track those five financial metrics from Money. They seem to be comprehensive and cover enough to let me know how I am doing financially.

Although, I don’t think I will track my FICO score every month. That isn’t something I will pull up every month. Maybe every 6-months or 12-months, but not more frequently than that. Besides, I need to pull a report from the three credit reporting companies, and you can only get one free report per year from each one of them from what I hear.

That leaves me to track four things every month. Here is a quick explanation of those four metrics:

Capacity – This is essentially how much room you have left for credit. If I have a credit card balance of $8,000 and a credit limit of $10,000, my capacity is $2,000. That’s useful to know.
Debt-to-Income Ratio – This is monthly debt commitments versus monthly gross income. Experts say this number should be 42% or lower.
Liquidity Ratio – This is a measure of your emergency funds, how many months you can pay your monthly expenses with your current cash or cash equivalents (accounts that can quickly convert to cash). The rule of thumb is 3 months for this ratio as a safety net.
Net Worth – This one is controversial. Some say you need to measure it, while others say it’s not worthwhile. It’s total assets minus total liabilities. Assets are cash, investments, house equity, and car value. Liabilities are mortgage, car loans, credit card debt, and medical debt. I will track this metric and hope to learn more about it going forward.

Recapping Metrics

Now I have metrics to track, trends to generate, and financial health to learn about. I’m glad to be starting somewhere. Glad to be tracking something. Being focused on something gives me a purpose, something to improve.

I’m already working on overall debt improvement, but this gives me specifics to aim at. Now I only need more data, which takes time. I will add this to my monthly budget. Next up will be monthly reports.

Leave a comment and let me know what you think about the metrics I’m using.

Check my monthly reports to see how I’m doing on my journey.

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