by Michael
This week I thought we’d talk about something a little different, metrics and goals. A good chunk of my job involves looking at different metrics to assess performance. Metrics can be applied to anything though, even personal finance. Let’s take a look at what metrics are, what they’re good for, and how they interact with goals.
What is a metric?
In short, a metric measures something in some way. This could be savings rate, net worth, miles driven, downtime, P/E ratio, etc. Just about anything can be metric depending on what your goals are. If you can find a way to measure it you can make it a metric. Usually, in personal finance, I see percentages or dollars as the units that are measured.
What makes for a good metric
Before we can talk about different metrics and how they can help meet your goals, we need to talk about what makes for a good metric.
- Trackable
A good metric needs to be trackable. There has to be some way to measure it. This could be any unit; dollars, time, Square inches of land, percent, or number of peanuts. The important part is that you have a way to measure it. I’d suggest percentages or dollars for personal finance, but I applaud anyone who measures their personal finance progress in individual peanuts.
- Have a time component
A metric is great, but it is meaningless without a time period attached to it. Baking 10 loaves of bread is great. But baking 10 loaves in 1 day tells me a lot more. I can apply that to a goal when I have the time period, say saving 2 peanuts. Measuring how many peanuts I’ve saved every quarter may work or I can turn it on its head and say in 3 months I want to have 2 peanuts saved.
Another note is that the time needs to be well set, too long and it takes a lot of time to get good data, too short and there’s too much noise. For most financial metrics I like to measure every month since it lines up with most of my bills. But you can either start with shorter (say weekly trips to the store) or longer intervals (Savings for a vacation you plan to take in two years) and then refine them from there to find what works to make the metric useful.
- Measure something useful.
There are a lot of things that I can measure. Number of words read a day, number of grains of sand on a beach, number of dollars spent. Some of these can be useful like the amount spent or words read. Others may not be useful to you like the amount of sand on a beach. An important note though is that a useless metric for you may be useful for me. The use is on a case-by-case basis.
- Build towards other Metrics
Not all metrics are created equal and can kind of “cheat” bullet 3. Some useful metrics require the tracking of other metrics. A common example is savings rate, to calculate savings rate you need to know your total income and expenses for that month. So you may have a goal towards having a specific savings rate, to track that rate you’ll need to track the components that make the metric you want to track even if you don’t directly use them.
Types of Metrics
Now that we have a few things to look for in good metrics we’ll take a look at a few financial metrics I track and why.
- Net worth
This is one of the most obvious for those seeking FIRE. To be FI you need to have a certain amount of assets saved. A month works out with my billing expenses, so it works with other regular expenses. I use this to track my overall progress to FI.
- Savings rate
Another fairly common metric for those seeking FIRE. This is the difference between your total income and total spending divided by your total income. This is more of an intermediate measurement. While this one helps me work towards FIRE, it shows me how I’m doing on the metric I have the most control over. I can’t control what the stock market will do, but I can control how much money I spend, to some degree. Depending on your pay schedule I could see the length being different, I do monthly since that lines up well with my paychecks and bills.
- Grocery expenses
This is a little less common metric compared to the last two. I track a handful of different expense categories. This will be useful for one of my goals regarding lowering expenses. But measuring these kinds of costs could be helpful if I set a goal for something like increasing my savings rate. Having this kind of data would allow me to look at where I can cut my expenses. I track this monthly because I only use it to calculate savings rate at the moment. But I could easily track this on a trip-by-trip basis.
- Average savings rate
This might be the least common of the financial metrics that I track. While I try to eliminate as much noise as possible from my metrics, that doesn’t always work. So by tracking a long-term average, I can cut out some of that noise from month to month. This also lets me see if I’m working towards my goals. For instance, I try to save 66% or more. I don’t always hit that goal every month, but I try to keep my average trending toward that number to account for the things that come up month to month.
- Hours of work bought
I don’t track this specific metric but I have seen others who do. As you save money you can start to calculate how many hours of your work you’ve now achieved towards FI or how much of your current take-home pay you could spend from your investments in RE. I’ve also seen this used to measure how many hours of work you’d need to make up the difference between a sustainable withdrawal from your savings to meet your expenses.
Benefits of Metrics
Now that we have some examples of metrics let’s take a look at what measuring them does.
The biggest advantage of these metrics is that they allow you to track your progress toward a goal. You may calculate that you need to have a savings rate of 66% each month to hit FI by your goal age. By tracking your savings rate, you’ll be able to make sure you’re on track for your goals. This is basically why I suggest connecting your metrics to a goal.
It can also allow you to measure how effective actions are. For instance, I’m trying to cut down on how much I spend on groceries. I’m making that goal actionable by trying to stretch some of the items I already buy a bit further or substituting items for a cheaper alternative. At the end of the month, I’ll be able to see how well these actions worked.
Examples
To use one of my own goals as an example, I want to have a net worth of $150,000 by the end of the year. Of course, I could just say that I want to have that amount saved by the end of the year, but that doesn’t do much for me if I don’t track my progress toward that goal, I might hit it, but I won’t know until I get there. However, if I track some metrics, I have a much better chance of being able to get back on track should I not be on track. Let’s break down how to track toward this goal.
What metric am I trying to measure? In this case, I measure my overall net worth in dollars.
How often will I track it? Month to month since that lines up with regular expenses that would lower my net worth.
How does it relate to the goal? It measures the exact item that relates to this goal.
With all that in mind, how am I doing toward this goal? Well, if we look at my regular graphs from my expense reports (links to my March 2023 update), I’m trending towards a higher value with roughly $31,000 left to save. If I do a simple least squares fit (currently I just don’t have enough data points to justify a different kind of fit) the current curve by the end of the year I’ll have a net worth of about $152,000. So I’ll be cutting it close to the buzzer with this goal, but I’m currently on track.
See the graph below if you’re interested in looking at the way I arrived at that assessment; the green dots are the data points that I have, the fit line is a projection of my net worth month over month with the current data and the horizontal line represents the goal I’m tracking (graphed using Desmos).
Another metric could be using this to work backward, I need to save roughly $4,000 a month to hit my savings goal, so rather than tracking this goal I could track my average savings month to month and see if it comes in near this value. Although at that point you could take it another step and say I need a savings rate of x% to meet my goal.
That goal may have been picking low-hanging fruit as when I created that goal I already had a rough idea of how much I’d be able to save at the end of the year. So how about I pick a different goal that’s a little harder to measure? This time we’ll use my indoor garden, as an example. For that goal early on I set out a list of plants that I wanted to get for the year, in this case; a tomato, a citrus plant, and a pepper plant. So how did I measure progress toward this goal? I just tracked the number of plants that I’d ordered at roughly 25% each.
How these metrics worked out overall, was mixed. When budgeting and pricing out the plants I didn’t take into account the cost of the pots nor how expensive shipping would be for these plants. That $82 that I initially estimated for the plants became about $110 after accounting for shipping. Pots can be very expensive and I didn’t do a great job including that expense as well (although two of the pots I plan to use I already had to buy), I should have made some part of this goal to account for the expenses of the entire thing maybe a smaller goal of saving some cash for a few months to cover this expense should it go over the initial amount I planned around. I also didn’t take into account the demand for some of these plants. At the end of it all, the tea plant was surprisingly hard to find a vendor for, so I bought the plants a little earlier than I had initially planned to ensure stock.
In this case, I chose the wrong metrics for the goal by tracking them as plants individually instead of tracking progress toward having the plants and everything they needed. In the future, I would probably break this goal down into a set of smaller goals, say price out the plants and figure out which vendors I plan to use by x date, price out the initial pots I plan to use by x date, have enough budgeted or set aside to buy each plant by x date (I’d probably make one goal and date for each plant unless I was getting them through a bundle), another one for the ordering by x data, and one for obtaining the pots by x date. I’ll probably do this for some of the other similar goals that I have and break them into more discrete steps as needed rather than have one overarching goal. I’d say overall this was just a bad goal that wasn’t concrete enough and needed more refinement.
As a last note though, there are most definitely goals where metrics would not be applicable some of mine can’t be measured such as expanding my engineering skills. The skills that I have as an engineer cover a lot of things but there’s not necessarily a specific aspect I want to work on, overall I just want to learn more and not constrict this view to a specific aspect of engineering. While I may measure this goal as working or not using specific measures (I.E. I got better at working towards choosing the best material for the application) but measuring progress may not be the most applicable year to year. But maybe that’s a bad goal and I need to refine it in some way instead of leaving it too open-ended and should make it more of this year I want to focus on this aspect and next year I start with how I want to become a better engineer.
So that’s why I track what I track and what I look for if I need to begin tracking something else. It boils down to making my metrics trackable, adding a time component, and being geared toward a goal. I use these to track my progress towards goals of my own and to help me find actionable ways I can work towards these goals.
