I have a laundry list of potential article ideas. About 637 of them to be exact at the time of this writing.
I keep them in a spreadsheet on a tab labeled “article ideas” next to the tab where I track all the posts on ESI Money.
The ideas are collected from thoughts and experiences I have, books and articles I read, etc. Basically it’s a brainstorming list I can review anytime I get writer’s block (which doesn’t happen often).
Many of these ideas will not see the light of day. I thought they were good at one point (when I wrote them down) but after letting them settle I know many are terrible. At least not great for a post on ESI Money.
But there are some good ones (or at least I think they are good), so when my buddy, Jeff, from Debt Free Doctor asked if he could do a guest post for me, I went to the list and selected the topic you’ll be reading about today.
Jeff is no stranger to ESI Money readers. He’s either been the feature or author of the following:
He and I spent a few days together a couple years ago at FinCon in Florida.
Jeff likes to live large by staying at Ritz Carlton hotels and I like to live large by having friends who stay at Ritz Carlton hotels. He had me and a few others over to his hotel for dinner, then we went to the lounge level upstairs, sat outside, and chatted for a couple hours. It was a great time and one I’m hoping to repeat in the future.
But for now, Jeff’s going to share his take on the seven financial numbers we should all track (or at least consider tracking).
After each of his numbers, I’ll share my thoughts.
Take it away Jeff…
Peter Drucker once said, “If you can’t measure it, you can’t improve it.”
When I used to do business coaching for dentists, one of the main results they were seeking was to make more money.
Who doesn’t want to make more moola, right?
One of the first questions I would ask them was, “Who gives you the money?”
Naturally they’d answer that it was their patients which led me to the BIG question, “How many new patients do you treat each month?”
It amazed me that most of these dentists had no clue. If patients bring them the money and they want more money then they should focus on increasing their number of new patients, right?
Same goes with weight loss. If you’re trying to get that summer beach body and shed a few pounds but never step on a scale to track progress, how’s that going to work out?
You’re right, it’s not.
Drucker was spot on in stating that if you can’t measure something then you possibly can’t get any better at it.
If you don’t have a clue of what you’re starting point is and where you want to end up then you have no idea if you are succeeding or not.
Unfortunately this is exactly how most people approach their financial situation. Many think it’s too difficult and overwhelming to manage so they end up putting it off which causes it to never be addressed.
I get it. As a busy doctor, life gets hectic trying to juggle work, friends and family responsibilities.
The good news is that becoming financially successful isn’t hard. Heck, even this Louisiana redneck can do it!
I’m of the belief that keeping matters as simple as possible is the key to success. If we boil down everything to the basics, then the majority of the most important aspects of your finances can be summed up by paying attention to a handful of simple numbers.
These financial numbers are similar to what you should track for your health:
- blood pressure
Making sure that you’re in the ballpark range of what you’re shooting for will keep you going down the right path.
Tracking your progress with these numbers will allow you to make sure you’re staying on pace to become financially independent and determining how good you’re handling your day to day money situation.
What are these financial numbers you should know?
Here’s the top seven financial numbers you should keep track of…
I used to be a frequent Dave Ramsey show listener and was always surprised by how so few of the callers knew what their take home pay was.
Most were aware of their gross income but unsure about how much they brought home each month.
It’s vital to know exactly what is deposited into your account on a monthly basis in order to become financially successful.
Your take home pay is your salary minus the deductions, taxes and any other withholding amounts.
If your goal is to reach financial independence, then it’s a no brainer that your focus should be on growing your income!
#1 and #7 could be combined, though I don’t mind breaking them out.
The income here falls into the category of what I’d call time-based ways to make money.
In addition to your career income, I’d also put side hustle income in this group — any money that you earn by trading time and effort for money.
Obviously this is a BIG one to track (and work on growing) which is why it’s listed first in this site’s name. 😉
One thing that didn’t surprise me regarding the Dave Ramsey show listeners is that most didn’t have a clue about their monthly expenses.
This is one of the main reasons why people avoid creating a budget…keeping track of all the money going out.
For high-income earners, having a substantial income is one thing. But if they don’t realize that their expenses are equal to or greater than their income, then financial success is next to impossible.
Just as easy is it is to spend money online, the same goes with tools that allow you to track expenses online too. There are plenty of apps out there that can help you keep up with where your money is going each month.
Knowing your monthly expenses is important for another reason…determining how much you should have stashed in an emergency fund.
A good rule of thumb is saving 3-6 months of your monthly expenses.
Again, it’s hard to hit this target if you’re unaware of your monthly expenditures.
I’ve come a long way on the budget thing.
I used to be militant that everyone HAD to have a budget.
But you know who didn’t have one for many years? Me.
You know who else doesn’t have a budget? Millionaires (or at least many of them).
So here’s my guidance for creating, using, and tracking with a budget:
- You need one when you are just starting out to get a handle on your money, help you save money, and generally just begin on the right foot financially.
- Once you master controlling your spending, you can slowly move away from a budget — from updating it every month to every other month to twice a year to once a year to every few years. Of course some people never get to the point where they can control their spending, so they need a budget all the time.
- When you start coming in for a retirement landing (5-10 years out), you need to start a budget again to MAKE SURE you know what your spending will be in retirement. You DO NOT want to get that number wrong or you might have a very bad retirement.
BTW, though we didn’t have a budget for many years, we did track our spending by Quicken. So I knew exactly what was going out. I just didn’t hold us to any specific spending caps.
In the thoughts above you could substitute “track expenses” for “budget” and I’d be good with that too.
Completing the training to become a periodontist caused my student loan bill to reach $300K.
We also had a mortgage and car loan to deal with.
After my job offer fell through two weeks before graduation, I didn’t have a clue where to turn.
Luckily I stumbled upon Dave Ramsey’s “Debt Snowball” method.
The first step involves listing your debts smallest to largest and attacking the smallest one until it’s paid off. Most would think you’d start with the one having the highest interest rate but Dave’s more focused on getting that “small win” to keep us engaged.
Dave says, “Paying off debt is not always about math. It’s about motivation. Personal finance is 20% head knowledge and 80% behavior. When you start knocking off the easier debts, you will see results and you will stay motivated to dump your debt.”
When I started paying off my debts, I made the decision to start with the lowest student loan balance even though it didn’t have the highest interest rate.
Paying that $2,000 bill off allowed me to see that I was taking a step in the right direction to financial freedom.
My highest-interest student loan had a large 5-figure balance. Initially trying to tackle something that large could have potentially stalled the process if something popped up along the way (emergency) and the snowball had to be paused.
This was an easy one for us.
We paid off our mortgage in the late 90’s and didn’t have debt from then on.
It’s pretty easy to track a number that’s zero for 20+ years. 😉
#4 Net Worth
Your net worth is an essential financial number that you should also continuously track.
It’s the difference between how much you own (assets) and how much you owe (liabilities). It’s a wealth scorecard so to speak.
- real estate
- cash in accounts
- other investments
Liabilities are essentially the sum total of all your debts such as your mortgage, student and credit card loans.
Most agree that the top “earning years” would tend to be from ages 35-44.
Check out the chart below of the average net worth of Americans which is surprisingly low, especially in the 35-44 category.
Net Worth Example
Here’s an example of Dr. A, a 47 year old surgeon, that’s concerned about his net worth as he’s been practicing for 10 years.
He’s interested in buying a new home but his banker needed to know what his net worth was in order to give him his best options.
He has the following:
- Home valued at $300,000
- Mortgage loan = $150,000
- Student loans = $75,000
- Duplex valued at $225,000 but owes $100,000
- Car valued at $20,000 but owes $10,000
- 401k balance = $360,000
- Cash and other investments = $100,000
This is summarized as follows:
- Assets = $1,005,000 ($300,000 + $225,000 + $20,000 + $360,000 + $100,000)
- Liabilities = $335,000 ($150,000 + $75,000 + $100,000 + $10,000)
- Assets – Liabilities = Net Worth ($1,005,000 – $335,000) = $670,000
Dr A should feel pretty good about his situation as his net worth ($670,000) is considerably higher than the average American in his age group ($100,404).
I think most ESI Money readers know what net worth is and how to measure and track it.
After all, we get a lesson in it every week with the millionaire interviews.
I’ve tracked my net worth for decades (Quicken makes it super easy) and consider it my top financial metric. It’s the one I put above all others.
And as for the median net worths, how sad are those?
#5 Savings Rate
Most people approach their financial life in the reverse order. They spend what they need (and want) each month and if by chance there’s anything left over, then they consider socking it away for future use.
If you don’t save any money for the future, then you’re NOT going to have much of a future to enjoy.
Saving money is one of the key steps to achieving financial success. Money gurus and advisors suggest we save 10% of our income.
The average savings rate in America is a paltry 7%.
In the book, The Richest Man in Babylon, seven wealth building lessons were discussed.
Lesson #1 was to pay yourself first at least 10% of earnings and Lesson #2 ties into to this by recommending to live below your means.
If you spend MORE than you earn, then trying to save money is impossible.
If you’re not putting back at least 10% of your income then let that be your first goal. But if you want to have an even better future with the possibility of retiring early, then shoot for 20%+.
And next…bonus financial numbers for those in search of financial independence…
We never tracked our savings rate.
We simply saved a “ton” and kept at it, knowing time would make us wealthy.
When I went back and calculated it we ended up saving 36% of our gross income over 20 years. Not bad at all.
Of course saving a ton was easier since we didn’t have a mortgage.
#6 Financial Independence (FI) Number
One of the most popular topics written about in the personal finance space is FI or financial independence.
Most start by teaching us to first calculate our FI number which tells us when we’re free from having to work.
Some base their FI number on their net worth. If that’s the case, then it’s the amount of net worth needed before becoming financially independent.
The standard rule commonly used for FI is the 4% rule.
It states that we need to accumulate up to 25 times our expenses in order to withdraw 4% of our net worth to cover those expenses (without running out of money).
For example, if you spend $100,000 per year, your FI number would be $2.5 million dollars.
Once you get to the point that your net worth is greater than or equal to your FI number then congratulations, you’re financially free!
I tend to calculate our FI number a little differently.
Instead of focusing on net worth, I focus on investment income.
My FI number formula is:
Investment income > personal expenses
You might be asking, “Where does investment income come from?”
Which leads us to our final financial number….
One of my biggest mistakes was not tracking this.
If I had, I would have realized that I was financially independent at 42 and could have retired a decade earlier.
#7 Passive Income
Investment income can be derived from multiple sources such as:
When your investment income exceeds your personal expenses, you no longer need to trade time for dollars (unless you want to).
Rich Dad Poor Dad author, Robert Kiyosaki, calls reaching this point “exiting the rat race“.
We focus on passive income from real estate, specifically multifamily syndications.
By using this method, we’re able to set a much lower number to reach financial freedom as our target is on cash flow versus a set number to draw down on.
Let’s use an example of someone (Ms. C) that lives comfortably on $120,000.
I understand that our friend here, ESI Money, couldn’t live on such a meager amount 🙂 but most of us “other people” could.
Now Ms. C loves to travel with her friends and the thought of being able to free up her time to do so at such a young age (44) motivated her to begin investing in her 30’s.
As soon as she became consumer debt-free, she began investing in passive real estate syndication deals with trusted sponsors.
She calculated her FI number to be roughly $1.5 million which is MUCH lower than what her financial advisor told her ($3.6 million).
At an 8% annual cash flow rate, $1.5 million would produce $120,000 per year or $10,000/month virtually tax free.
How? The benefits of depreciation offset the monthly passive income.
Hahahaha! And this from Mr. Ritz Carlton! 🙂
I’m a big fan of income (passive or not) and have recently written the following:
I also detail our multiple streams of income in my annual financial updates here at the beginning of each year.
Do You Know Your Numbers?
Now you know the seven most important financial numbers that will help you track how you’re doing regarding debt, income, savings and if you’re interested, financial freedom.
Do you track all of these? Or maybe you track different ones? Let us know your thoughts in the comments below.