Are You On Course With Your Money?
In a modern aeroplane, the onboard flight computer monitors the operation of the aircraft and alerts the pilot to any relevant issues. While there are a lot of instrument displays, switches and audio alerts, the pilot tends to focus on just a handful of metrics like altitude, wind speed, fuel consumption and oncoming weather.
By focusing on those factors which are likely to have the most significant impact on flight safety and speed, the pilot minimises mental fatigue, plots the most efficient course and remains better prepared to deal with any potential emergency.
When it comes to your financial wellbeing, it makes good sense to monitor a handful of metrics that will have the most crucial impact on your financial wellbeing and minimise money-related stress and effort.
These are the main money metrics that I use to monitor and measure my own financial wellbeing:
Metric 1 - Emergency Reserve Savings
I aim to maintain 12 months of my Essential spending in an instant access savings account and NS & I Premium Bonds. It's currently a bit less than that, as I've spent a lot on property development recently. So my key priority over the coming months is to top it back up to my target amount.
Your target doesn't need to be 12 months like mine, but having three months' expenses covered should be your minimum target.
Metric 2 - Mental & Physical Wellbeing
It might sound odd having a non-financial metric, but I take the view that you can't work and earn well if you aren't in good mental and physical condition. And research shows that poor mental and physical health can lead to people making poor financial decisions.
I measure this using simple things like blood pressure, weight, sleep patterns and general mood.
“One of my financial wellbeing metrics is my mental and physical wellbeing. It might seem odd having a non-financial metric, but you can't work and earn well if you aren't in good mental and physical condition.” Tweet This
Metric 3 - Savings Rate
As I learnt many years ago, it's not what you earn that matters but how much you keep. Money Milestone 5 is to save and invest 15% of household income for life after you no longer wish or are able to work.
I aim to save 50% of my net income while I continue to work and earn, but am currently managing to save about 65%. I can do this because, in addition to income from working and assets, my living costs are relatively low.
Metric 4 - Net Worth to Lifestyle Ratio
When I eventually stop working and have to start living entirely off my wealth, I will use 4% per annum of my assets as my central metric for a sustainable annual withdrawal to spend. That means my spending to net worth must be 25 to 1.
So, if I want to fund a lifestyle of, say, £60,000 a year, I must have a net worth (excluding my home) of £1,500,000. If I can get by on just £30,000 per annum, I only need £750,000. We disregard any income from State pension or deferred defined benefits, but if we deducted those from our desired lifestyle spending, we’d need less capital to fund the balance.
This key metric is a ‘rough and ready’ way to help my wife and I make decisions about gifting, investing, spending and working.
Metric 5 - Happiness and Fulfilment Through Work
If you spend a lot of time working, you might as well make it enjoyable. And if it is enjoyable the chances are you'll not be in a rush to retire. Several studies show that, at least in the less physically demanding jobs, working longer is associated with better wellbeing outcomes.
I measure my work-related happiness on a scale of 1 (low) to 5 (high). Things that affect my assessment include:
The positive impact I have on other people measured by direct and survey feedback or formal recognition;
High levels of autonomy and the ability to control my schedule;
The ability to do highly creative, varied and meaningful work;
Interaction with other people and the ability to help support them in any way that I can;
Being paid fairly for the value that I create, whether that is immediate cash or longer-term benefits.
My current score is 4 out of 5, mainly because I can't meet colleagues or audiences in person as a result of the COVID situation. Like many people, I enjoy human interaction, and I can't wait to be able to do in-person events and meetings.
Choose What Works For You
You don't need to adopt the same financial wellbeing metrics as me, but I would urge you to create ones that make sense to you. Combined with your values, lifestyle priorities and Money Milestones, money metrics will help you make better progress with your money and be financially healthier and happier.
2020 has been a challenging year for most people, whether that relates to their financial or mental wellbeing. But having an idea of how you'll track your financial progress in 2021 and beyond can help you feel more in control, and make better money-related decisions.
Warm regards,
Jason