Four Indicators for Tracking Your Financial Goals
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Handling money is tough. You need to set a budget, prioritise spending, invest wisely, set financial goals, and periodically track them. While setting financial goals might appear easy, it is very important to track these targets to ascertain how fruitful your fiscal strategies have been and if any changes are needed.
Financial goals are unique and vary per person. Hence, their measurement cannot be standardised. However, some general indicators can be easily used to track financial goals from time-to-time. One important point to remember while setting these indicators is that they must be easily quantifiable. Merely setting goals will not help you achieve them. Timely tracking to analyse progress and deviations is equally important and critical to become financially secure in the long-run.
Here are four important indicators that will help you easily track your financial goals:
This is a very easy indicator to track your fiscal goal performance. Measurement of net worth has been helping people manage their funds easily for years. It has proven to help guide people so they can understand their financial standing by evaluating how much they own versus how much they owe. It gives them a clear picture of their assets against liabilities.
Assets in this context can include bank balance, real estate, cash deposits, investments and retirement accounts, house, car, and insurances, while liabilities can include current outstanding loans, mortgage, credit card bills, rent, etc. Subtracting these liabilities from the assets will provide a net worth figure that is a depiction of your current economic situation. This net worth figure should be sufficient to meet your financial goals like retirement, travel, house, etc. The amount you derive should ideally exceed your goals, as that can give you increased flexibility to meet unexpected urgent expenses too.
In addition to this, to gain a fairer picture of the scenario, it is important to compare your net worth against consumable or non-investment assets that are brought for consumption such as a car, house, etc. Pairing net worth against consumable assets will provide a relative net worth (RNW), which will indicate how much of these funds are required to maintain your current lifestyle.
RNW = Net Worth/Consumable Assets
Thus, to know if you are on the right track towards achieving your financial goals, your RNW should be enough (ideally above 100%) to sustain your current lifestyle and also meet your targeted financial goals. Moreover, it is important to note that this indicator should be calculated semi-annually and should increase with time.
In literal terms, a credit score is a measure of the creditworthiness of a person. It is a very powerful indicator of one’s financial health and progress towards monetary goals. The credit score will fall if a person defaults on their credit card payments, mortgage costs, premiums on loans, etc. A low credit score indicates an unhealthy financial situation which is an obvious indicator of a slow economic growth. A low credit score is also a sign of underachieved current needs and future goals. Alternatively, a high credit score implies that there are enough funds to suffice for your present-day requirements as well as your long-term goals like retirement, etc.
The scale of credit scoring starts from 300 to 850. A score of 700 and above is generally considered a good score. You can evaluate your credit score online on different websites or seek help from a professional financial advisor.
All financial goals are based on your savings. No matter the term (long, medium, short) or the grandeur of a goal, they can only be achieved if you save earnestly. Savings need to be derived from a well-crafted budget and strict adherence to the set limits. But often, one might deviate from the plan, reducing the savings and thereby causing a blow to the savings rate.
The savings rate is essentially the amount you need to save every month for retirement, a major purchase, or investments, etc. You must fix a saving rate while setting your financial goals. For example, if your goal is to have X dollars when you retire, then you must calculate how much you would have to save now to achieve that figure within the time you have. This rate must be calculated by considering your current income and subtracting all expenses to arrive at a figure which is at your disposal for saving. This figure should then be divided by your income to know the saving rate for achieving the target of X dollars. The higher the rate, the better are your chances. Ideally, a 15% saving rate is considered the most optimal. It is also important to factor in aspects like inflation, unprecedented expenses, etc. and allow room for them in your savings plan.
In this context, it is important to take note of discretionary and non-discretionary expenses too. While accommodating for expenditure, it is important to factor in all non-discretionary spending such as gas, mortgage, bills, groceries, and all other basic things which cannot be avoided. All other costs like dining out, shopping, travelling, etc. which are discretionary must be controlled to improve the savings rate. In addition to this, if your total income is only enough to meet non-discretionary expenses, you may not have any savings at all, and hence, will be unable to achieve your financial targets. If the total income is sufficient to meet the non-discretionary costs and there is enough for discretionary spending, it implies that there is a higher scope for savings. This can be calculated via an indicator known as living within means (LWM).
LWM = Income at disposal (after-tax)/non-discretionary expenses
The higher the LWM, the better are the chances of having savings. Your LWM should increase over time to reflect positively on your progress towards achieving your financial goals.
One of the most widely used and easy indicators to track your financial goals is to keep a check on your cash balances. By all means, the flow of cash with you should always be positive, but the sources of cash balances should be either actual income or passive income and not debts/loans. Passive income is the money you earn from your investments such as interests, rental income, etc. This is the income you earn when your money grows over an accumulated period of time. To know your monthly cash flow, you need to combine your passive income with your actual income but before the final figure, you would need to subtract the expenses to know your monthly cash balance. This figure should be positive to indicate a sound financial position, which has a corresponding impact on financial goals.
To sum it up
These four indicators help in tracking financial goals by preparing a comprehensive scorecard reflecting your monetary health periodically. If you want to be more purposeful and determined towards achieving your financial goals, you should try to adapt these metrics and modify your spending and saving habits accordingly. A careful execution plan along with regular evaluation of your plan will help you understand whether you are on the right path or not.
You can also get in touch with professional financial advisors, to seek exemplary guidance that will help you accomplish your goals easily.