Personal Wealth Metrics

In this week’s product design and validation course, which I’m taking at UW Professional & Continuing Education, we covered metrics.

I really hate metrics. As a project manager, I deal with metrics daily and it drives me nuts. However, the measure of performance is a necessary evil because if you can’t measure it, you can’t improve it. And companies must constantly improve themselves by adding value to their products and services, which will ultimately grow their business.

So how can we use metrics and apply these principles to improve our financial wellbeing? In this article, I will dive into a few of my personal favorite metrics.

What makes a good metric?

  • Comparative – can it be tracked over time? can it be compared against a competitor?
  • Understandable – is it easy to understand?
  • A ratio – a measure between two opposing factors.
  • Affects behavior – can you be held accountable?

Choose metrics that makes sense for what you’re trying to measure. In addition, the metric must drive change in your behavior. So if you’re trying to pay down debt, buy a house, or become a millionaire, you need to identify the right set of metric(s) to improve and achieve that goal.

Lastly, create a baseline. A baseline marks the start of your journey. So if you’re paying down debt, you’ll need to know the total debt that you owe. Or if you’re buying a house, you need to create a baseline of your FICO score, since that will dictate the interest rate on your mortgage.

One Metric That Matters (OMTM)

The one metric that matters is the single most important metric that outranks all others. My personal OMTM is net worth.

Net Worth

Net worth is all the stuff that you own (assets) minus what you owe to third-parties (liabilities):

Net Worth = Assets - Liabilities

I suspect that most people use their salary as a metric to compare their financial performance to their peers. Unfortunately, salary is what you call a vanity metric since it only tells you a small part of your financial story. You can take home $150,000 per year and still be living paycheck to paycheck. These are some of my peers working in the technology industry in Seattle — a net worth spinning of wheels.

Let’s break down the two components of net worth.

Assets

Asset is defined as a resource with economic value, a resource that someone is willing to buy from you in the economy (as opposed to a resource that holds sentimental value to you):

  • Cash
  • Investments (401K, IRA/RothIRA, Stocks/Mutual Funds/ETFs, Digital Currencies 🚀)
  • Home (real estate)
  • Automobile
  • Jewelry

Note that automobile is a depreciable asset, an asset that loses value over time. It’s not a good asset to own as you want to own assets that appreciate, or gain value over time.

Liabilities

Liability is defined as legal financial debt or obligation. Most common forms of personal debt include:

  • Mortgage and/or Home Equity Line of Credit (HELOC)
  • Auto loan
  • Student loan
  • Credit cards
  • Personal loan

Some debt may be good debt if it’s used to buy an appreciable asset like a home (mortgage) or to improve your skillset (student loan) so that you can earn more money. Of course, if the amount of debt you have exceed your asset, then you’ll have a negative net worth. So use debt with care.

My philosophy on debt is to not have it at all, mortgage included. The path to financial freedom is removing all forms of financial obligation to the point where you are no longer obligated to wake up every morning because you need to generate income to pay a mortgage, student loan, buy fancy stuff, etc.

How to Track Net Worth

The best place to track your net worth is Personal Capital.

I use Personal Capital as my financial dashboard where it links all of your financial accounts in a central location, downloads the balances of each account, and calculates your net worth in real time.

There are two downsides to Personal Capital:

  • Once you hit above their $100,000 threshold (I believe), their financial consultants will start calling you to offer advice and services on regular basis. Fortunately they call from the same number, so you can easily block it if it bothers you. 😅
  • The second downside is personal data. I’m keenly aware of what happens when you use a free service like Personal Capital. So read up on their privacy policy if you’re like me.

I think the convenience of a centralized dashboard for your finance outweighs the two downside mentioned above.

Other Metrics That Matter

There are other financial metrics that I track, which I may go over in detail in another article. Here are a few useful metrics that I use as financial indicators:

  • FICO Score – An important score if you want a bank loan. Once upon a time you had to pay money to see your score. Fortunately, many credit card companies like Chase, Bank of America, and American Express will give your score to you for free if you’re a customer.
  • DTI Ratio – important ratio used by banks to give you credit.
  • Credit Utilization – another credit ratio used by banks to how responsible you are with credit.

Of course that’s just a start in personal finance metrics.

Reach out to me on Keybase or Twitter if you have any questions.