Many of us have been taught to pursue 'vanity metrics' when measuring our financial success and health.
These vanity metrics, while important and often externally impressive, do not indicate financial health or stability.
Some examples of vanity metrics include:
a high salary, expensive car, high house price tag, high or no credit card limit, just to name a few.
These metrics are externally impressive, but can hide the financial quicksand gradually sucking us in.
It's like focusing on the design of a beautiful roof, while neglecting the shaky foundation of the house.
So what metrics should you be measuring?
The 5 metrics that provide a true indication of your financial health and stability
It's like your financial report card. Net worth is what you own (assets) minus what you owe (liabilities). Positive is good; negative, not so much. Getting to zero is a great first step!
Liquid Net Worth
Think of it as your financial flexibility. Liquid net worth is the portion of your net worth in cash and cash equivalents. They're assets that are easily liquidated and converted to cash.
In case of an emergency, in which you need money quickly, your liquid net worth is what counts.
Debt to Income Ratio
This ratio shows what portion of your income goes to paying debts. Low is good; high might mean you're biting off more than you can chew. Lenders consider a DTI of 28% or lower a sign of good financial health.
The savings rate is the percentage of your disposable income that you stash away for the future. The higher the better for financial security and it's a good indicator of your financial health.
The US average savings rate hit a high of 7.21% at the height of Covid in 2021 and currently stands at 3.4%.
Credit Score and Insurance Score
This is your financial reputation number. These scores tell lenders (or insurers) how reliable you are. Pay on time, score goes up; miss payments, score takes a dive. That can lead to more expensive borrowing (higher interest rates) and more expensive insurance! Besides timely payments, other factors can influence your scores.
How to use these metrics to measure your financial health
Create a simple spreadsheet to track these metrics at least once a quarter. Think of it as a quarterly financial check up. Over time, you will begin to see trends and areas you can improve. You can set goals for each metric and challenge yourself to meet our beat your goal.
The bottom line
Vanity metrics may look impressive but they are not an indication of financial health. To truly know how well you are doing financially, you must measure and track the 5 metrics detailed above.
Need help figuring out these metrics or just want a financial check up? Take advantage of a complimentary session.