7 Ways to Measure Your Financial Success ( Explained By a Certified Financial Planner )

Hey, what's going on everyone and welcome to the school of personal finance. So, with all the chaos continuing to go on in the world with the tariff talk, the volatility in the markets, everybody worrying about what is coming next, I wanted to do a video this week going back to the basics. So, in this video, we're going to talk about seven ways to measure your overall financial health. And these are things that you should be tracking each and every year going forward because they are going to tell you if you are on track to reach all of your financial goals. I hope that you find this one helpful. Let's get to it. All right, real quick before we get started, head over to schoolofpersonalfinance.com. Come join my membership club. So, I am just about to launch my membership community and we're going to be going through exactly things like what we're talking about in this video. Come check it out. Come join me. I'll see you over there. All right. All right. So, the first metric to track your financial success is one that I'm always talking about, and it is called your savings rate. So, even in my financial planning software, when I'm doing one-on-one financial plans for people, that's one of the first numbers that we calculate and that we look at is what is your actual savings rate? And all it means, it's your percentage of your income that you're able to save and invest for your future. So, a simple example, if you make a h 100red grand every year and let's say you're putting in $10,000 into your 401k, you're maxing out your Roth IRA. So, let's say that's another $7,000. And then you're able to save $3,000 a year in an emergency fund. That would be $20,000 total that you are saving out of your $100,000 gross income. So, that would be a 20% savings rate. So obviously the higher that number is, the quicker the path to financial freedom. All right, the second metric is another one that I'm talking about all the time. And I always joke around. I say that I've been doing this since I graduated college. I used to do it with just an actual sheet of paper writing it out and I have a folder each and every year where I could go back and scroll through and look and it kind of tells the story of my financial life. And that is tracking your net worth. So all net worth is it's all of your assets, right? So like your the value of your home, your savings accounts, your 401ks, IRA, HSA accounts, the values of any assets that you currently own minus the liabilities. And liabilities, that's just money that you owe to people. So credit card debt, student loans, mortgages, car loans, right? So any loans that you owe. So you take all of your assets, add them up. You take all of your liabilities, add them up, you subtract the liabilities from the assets, and that is your net worth. That is the single best measure of how you are doing financially and a lot of it is out of your control. Right? For example, in 2022 when the market dropped over 20%, a lot of people's net worth went down because a lot of people had their wealth, their assets tied up in the stock market or even the housing market. The housing market has been on fire for pretty much over a decade now. That has really helped increase people's net worth. So, it's really the combination of you saving, investing, and also the assets growing while you're also paying down debt. So, as you get older and you're paying down your mortgages, your car loans, your student loans, right? Naturally, your liabilities are going to be going down because you're making monthly payments to them. So, it's a great number to track. It tells your whole financial life in just one page. So, if you don't do that now, start doing it now. There's software out there. You could use spreadsheets. Um, I still have my nice binder of all my handwritten net worth statements, but it's a great thing to track that you could go back and look at. All right. And then number three is what I refer to as the happy gap. And that is basically the difference between your monthly income and your monthly expenses. The wider the gap is between those numbers, the happier you are going to be in life. So, for example, if you make $10,000 a month and your monthly expenses are $6,000, that is $4,000 that you have left over every month to save and invest. If you make $10,000 a month and you spend $10,000 a month, then life is very stressful and you're not able to save and invest that money. So, cash flow, I'm always talking about tracking your numbers, turning the lights on, right? Money in versus money out. What does it look like? Where does your money go every month? These are very important metrics that you need to be tracking on a monthly basis so you know where you stand financially. It all tells a story, right? Are you spending money on things that are just not important to you that maybe you could cut where you could then go ahead and invest that money for later on in your future. So look at your income, look at your expenses, what is the difference between those two, and then make smart decisions with the money that is left over so you could grow your wealth and grow your net worth, save for the future, and lead to a happier life, to a happier retirement, to less stress, to have an emergency fund, all those things. It all begins with your monthly cash flow. All right. And then the fourth metric to track is the amount of money that you have saved for your eventual retirement, right? in the tax diversification of those retirement accounts. So, how much money do you have in pre-tax money, traditional 401ks, IRA, because the amount that you have in there is going to be subject to taxes, right? So, Uncle Sam is a partner with you in those accounts. They're going to be getting their hand, the government's going to be getting their hands on a good portion of those accounts depending on what the tax rates are, right? Then, how much money do you have in Roth accounts? Those are going to never be taxed. So those Roth accounts when you take money out later on in life in retirement, you will owe zero income tax. And then the third bucket is those brokerage accounts, savings accounts, accounts where you'll only be paying taxes on the gains, on capital gains or on the interest that you earn from savings accounts. So it's great to track those three buckets and look at the percentages. If you have 0% in Roth right now, then that is something that you want to change and you want to start tracking. How do you build it up to maybe where it's 10% of the overall amount you have saved for retirement up to 20%, 30%. Right? The more you have in Roth, the better off you will be in retirement. And it's good to have some in all those buckets so you could control your tax brackets in retirement when you are taking distributions. So this is an important part to track and start now because if you have no Roth and you don't even know how to start Roth accounts, now is the time to start learning about it and start building up that tax-free money. And then the fifth metric that I love to track is how much interest are you paying on loans on money that you owe to people and what do those interest rates look like? So there are some loans that all of us have that it's hard to get away from like a mortgage, right? But hopefully the interest rate on your mortgage is low. I mean rates are high right now, right? We're looking at a 7% 30-year fixed rate mortgage. But for a lot of people, they're able to lock in those low rates a few years ago, 4%, three and a half percent, and hopefully that's where you are on your mortgage. But if you have debt where you're paying 7%, 8%, home equity lines of credit right now in that range, student loans could be in that range depending on when you took out those student loans. And then you have the worst type of debt, personal loans, credit cards. So if you're paying 15 20% on any debt you have, then that's public enemy number one. you have to put that at top of the priority list and start banging that out. So tracking all these things and looking where you're paying interest, it tells a story about how your financial health is and what you need to prioritize. All right. And then number six is do you have any passive income streams? Now, it's not easy to grow passive income. And some examples of passive income could be like just money that you have sitting in a savings account that you're earning 4%. That interest is passive income, right? If you have CDs, if you have dividend paying stocks where you're able to generate an income every month off the stocks you own just from the dividend distributions, those are all considered passive income. Some other sources, one which I'm a big fan of, even though right now it's a very hard time to invest in real estate, owning single family rentals, multifamilies, right, where they're giving you a monthly passive income. Now, it's not totally passive, right? So, I own some rental properties and they could be a headache at times and there's a lot that could go into them, but for the most part, they are passive or even real estate investment trusts, REITs where you can invest in those and they pay a high dividend. So, it's a good thing to think about, you know, how much money do you have actually coming in every month that you're not actively working for. And for a majority of people out there, the answer is zero. So, what steps could you take to just start slowly and start building up some passive income so maybe by the time you retire that could supplement social security, right? Or a pension and you could have some money coming in without having to work for it. All right. And then the seventh and last metric that you could measure is what we call your financial freedom score. And basically what that is, it is your total amount of investments that you have divided by your annual expenses. So, I'm not sure if you've ever heard of the 4% rule before. Basically, what it is is that you could take out 4% from your investment portfolio each year and then increase it for inflation and you should never run out of money or at least through your life expectancy, you would have a very high probability of not running out of money. So, a simple example would be if you had a million dollar in your investment portfolio and you withdrew $40,000 a year in year one and then in year two you could up that by say 3% if inflation is 3%, right? So, another $1,200 that you could add. So, $41,200 and then keep on adding a little bit more for inflation every year and that $1 million portfolio should sustain you throughout your entire lifetime. So that is considered you know the freedom number where once you reach that pinnacle where you have 25 times your annual expenses in an investment portfolio that you would then be able to retire. You have to think about things like social security and pension. Right? If you have social security and let's say that that's $30,000 a year and your expenses are $70,000 a year, right? Then there's a $40,000 difference that you need to make up from your investment portfolio. So this financial freedom score or freedom number right it's just how much assets do you have divided by your annual expenses and once you reach that point where you have 25 times your annual expenses in an investment portfolio you are then considered financially free where your investments will sustain you throughout retirement. Now I don't put a ton of weight in the 4% rule because everybody's retirement looks very different. A lot of people right when they retire, they want to be able to go out and travel the world and spend a lot of money and then they start to slow down as they get older, maybe through their 70s and their 80s and then at the end of life you might have some very large expenditures, some health care going into a nursing home. So that's why we call that the retirement spending smile where you start up high and it starts to go down as you get older and then the last few years of your life, you know, your health care expenses could shoot those um those numbers way up high. But everybody's different in retirement. So the 4% rule, it's just a rule of thumb. It's a guide. I don't live by it at all, but it's just a good number to track towards, right, for financial freedom where you want to have 25 times the number, the amount that you're going to need to supplement your social security or if you have a pension in order to make up your total amount of expenses. All right, everyone. That is it for this one. I hope that you found it helpful. Go check out school of personal finance.com. These are all the things we're going to be talking about in my membership club. So, I'd love for you to come join me. Jump on my email list. I will let you know once it actually goes live and you could go ahead and enroll in it. But till then I will see you in the next video. Take care.