Friday, September 10, 2021 / by Mario Daniel Sconza
We talk a lot about the methods and techniques you can use to improve your financial life, but we sometimes overlook the obvious – what's the best way to measure your results?
When you were 19 you could just look at your bank balance, but as you grow older and your finances get more complicated, it doesn't paint the entire picture. If you really want to keep on top of your progress, here are some of the most relevant metrics used by the Enriched Academy financial coaches.
Add up the value of all your significant assets (houses, cars, investments) and subtract all your outstanding debts (mortgages, credit cards, LOC, car loans, etc.) and whatever is left over is your net worth. It can be negative or positive, it will definitely fluctuate (how much more is your house worth this year than last?), but it will always be the gold standard for measuring your financial standing.
If you are serious about getting an overall measurement of how your budgeting, saving, investing and other financial initiatives are working, you should be calculating your net worth on a regular basis
You need to know where your money goes every month before you can start trying to cut back. Some expenses are regular (loan/mortgage payments, some utilities, RRSP/TFSA contributions) and can be easily monitored almost to the penny, while others fluctuate depending on the season or your social calendar (food, clothing, entertainment, travel).
The key is to track all your expenses for several months and land on a monthly average spend you can use as a benchmark going forward. You can always dive into your expense tracking details to find specific areas to cut back, but keep your focus on the bigger picture of average monthly spend.
High-interest Debt Reduction
Some debt is inevitable and while you may be tempted to attack a low-interest mortgage, it isn’t mission critical if you are disciplined and saving and investing that extra cash. On the other hand, any higher-cost debts (over 5%) like credit cards, LOCs, vehicle loans, student loans, etc. need to be dealt with asap.
Fortunately, of all the ways to measure your financial progress, none is more satisfying or inspirational than tracking the month-to-month demise of a long-standing, interest-sucking debt like a credit card balance.
Beyond the stress relief and emotional boost, it also makes a huge impact from a financial perspective. That money previously wasted on interest is now going to steadily flow back into your pocket and can be used to attack another hi-interest loan – or to save and invest!
While you may not agree that your credit score is an accurate picture of your financial situation, it is an objective, frequently used 3rd party yardstick that is based on real world data. It is also quite responsive to change, although it may take a few months to catch up due to the lag in collecting data.
If you are responsible (or irresponsible!) with your use of credit, you will very likely see a corresponding change in your score. Also keep in mind that your credit score is key to capitalizing on many opportunities, not just lower interest rates on loans. You should check your score a couple of times each year.
Many people are blissfully unaware of how much the fees (the ubiquitous 2% MER for example) on their investments are costing them every year, and how these fees are compounding over time to rob thousands from your retirement fund. You should be investigating all the fees (built into funds and any additional fees paid to your advisor or bank) and keeping your total under 1% annually.
There are some very low-cost DIY investing options that are well below 1%, but they may require more time and knowledge than you have. Find a solution that works for you, but always keep a close eye on the cost.
Reliably and accurately assessing your progress is a must if you are serious about improving your financial situation and want to sustain that improvement over the long-term.
If you would like to hear more, financial coach Alanna Abramsky and one of her clients will be hosting a live webinar next week to talk about the dramatic transformation in the client's finances, the changes that really made an impact, and the results she has achieved.
Everyone from your dad to Warren Buffett says this, but which index fund (there are hundreds) and how many funds should you buy? A great read that provides a little more substance to the "just buy an index fund" advice we often hear.
Anyone who owns a mutual fund would do themselves a huge favour by listening to this 2-minute video on the fees built into these funds. It's short and simple, but it shows how you could easily add thousands of dollars to your retirement nest egg with a lower fee investment option.
Current mortgage rates seems like a once-in-a-lifetime bargain and it has created lots of options and quite a dilemma for both existing homeowners and new buyers. Is it time to load-up and lock-in debt at bargain rates, or is a rise inevitable with the only suspense being when it will start and how fast they will go up.