My fiancé Ian is a total rule follower in the kitchen. He likes to make every dish exactly as it’s laid out in a cookbook. If a recipe calls for “stock” he doesn’t settle for broth.
I, on the other hand, tend to be quite a bit looser in my culinary endeavors. I’ll add a dash of this here and a dollop of that there, even when it’s my first crack at making a recipe.
(What does this have to do with personal finance? Hold tight. We’ll get there shortly.)
To be totally honest with you, Ian’s food almost always tastes better than mine. Significantly better, in fact.
Now why — barring a raw awakened natural talent — could that be?
Well, before we make any guesses, let’s consider the indisputable facts for a moment:
- Neither Ian nor I are professional chefs
- We both enjoy cooking and eating a good meal
- Ian follows a recipe
- I do not follow a recipe
- It’s on the last two items that I’d like to focus
You see, Ian does something smart when he cooks. I’ll call it setting a “recipe benchmark.” He follows the original recipe to a tee because then he knows exactly where he started and how he can improve in the future. I set no such benchmark when cooking.
This fundamental difference in our approach to cooking has a noticeable effect on the success of our meals.
You see, whereas Ian’s carefully followed recipe begets repeatability for future meals, mine begets luck or chance to achieve the same desired result. While not a totally terrible thing (we still get food at the end of the day), I can’t replicate a meal I’ve made, even when I want to. Furthermore, I can’t necessarily figure out what it was that made my meal work (or not work).
At the end of the day, my reliance on luck is much less predictable than his reliance on the facts.
This is no small thing.
Standard benchmarks give you something to measure your progress against. You wouldn’t simply start and end a marathon where you think you should. A marathon has a clear starting line because 138,435 feet away there must be a finish line.
The importance of measuring becomes strikingly evident when you start thinking about how almost everything we do has a natural starting point. Our progress through education, for example. Our career trajectory. We are constantly working towards goals and results, whether we’re fully aware of it or not.
That said, we’re not, unfortunately, always measuring progress towards our goals.
While a lack of measurement isn’t always a huge issue (my cooking, for example), it tends to become so when personal finance enters the picture.
(In case you were wondering, we’ve now arrived smack-dab at the center of how this post relates to personal goals.)
How Measuring Your Financial Goals Can Help You Achieve Them More Effectively
Personal finance includes hundreds (if not thousands) of items and decisions that — when put together — make up your financial plan. There’s saving. There’s investing. There’s spending. There’s home buying, etc.
Personal finance also happens to be fraught with all sorts of obstacles. Things like fear, frustration, miseducation, and oh so many more.
The result is a big mixing bowl of financial items that may or may not seem to work nicely together. It’s enough to overwhelm anyone when combined.
This “overwhelmed state” is where many people often find themselves; meandering through a bunch of variables with no real sense of where they’ve gone or where they’re going next. Not only is financial wandering like this mentally exhausting when trying to achieve a goal, it makes it incredibly difficult to move forward.
But imagine if there was some sort of recipe you could follow to reach your financial goals. Sounds pretty nice, right? With a financial recipe, you could combine different financial actions or options in a way that makes sense for you and produce the desired result.
The good news is there are tons of financial recipes (we’ll call them out for what they are – financial strategies). The great news is that you get to choose which one to follow. The only thing you need to decide is a goal (or several).
For example, say you want to contribute more to your 401k. There’s a recipe for that. Or maybe you want to invest 25% more of your income each month with a positive return in the next 10 years. There’s a recipe for that, too. One of my personal recipes is to pay off my student loan debt in the next five years.
Each one of the above goals is attainable. There’s just one catch. (Don’t worry — it’s not too bad.)
The stipulation here is that you must measure progress towards your goal.
Personal finance isn’t just about reading an article on the internet, giving a half-hearted try at something for a few days, and then throwing your hands up. Working towards a financial goal takes discipline. It requires special maintenance over time. Most critically, it requires you to be intimately aware of the progress you’ve made since you started.
Measuring your financial plan and understanding how it edges you closer (or sometimes farther) from your goals results in a much more stable and predictable outcome. And, unlike the cooking anecdote I mentioned above, where the stakes are relatively low on a normal day, measuring the success of a financial plan can often result in wealth or financial freedom.
Sounds pretty nice right?
How to Measure Your Financial Goals
Now that we see the benefit of measuring goals, how exactly do we go about doing it? There are many different ways to approach it, but every strategy tends to include a few absolutes. I’ve listed them below.
You’ll notice that these are not extremely complicated. That’s good news! I’ll let you in on a little secret: most complex things are built on a foundation of basics. Here we go.
1. Set your benchmark
Your benchmark acts as the starting point from which you’ll start measuring progress towards your goal. Consider it like your home base. With benchmark information at your fingertips, you know exactly where you’re starting from.
While not every benchmark will be the same for each financial goal, most can be set by looking at your bank statements, adding up your current debts, calculating your expected income, etc. These numbers will allow you to understand if you’re moving closer or farther away from your goal each month.
Friendly reminder: be absolutely honest about your numbers. Just as you would expect a bank to accurately measure how much money you have in your bank account, you must also employ that same expectation for measuring on yourself. If you don’t, there’s a higher likelihood of skewed data. That means no padding with “next month’s paycheck” etc. Cold, hard numbers folks.
2. Choose an objective to measure
You may have heard the phrase, “You make what you measure.” I’m not in absolute agreement with the sentiment, but it’s a bit easier to swallow than, “Don’t measure anything and just cross your fingers everything will work out.”
It’s infinitely easier to measure progress when you choose something that you can actually measure. Luckily with personal finance, this is relatively easy. The result you measure usually has to do with a number of some shape or form. For example, you may choose to measure your savings account because you want it to go up by $100 each month. Or you may choose to measure your grocery bill because you’d like to see it go down by X% each month.
Whatever result you choose to measure, this is the number or calculation that you’ll come back to each time you check in.
3. Iterate based on results
I almost made this title, “Iterate if necessary,” but I realized that ignores an important fact of personal finance: you will most definitely need to iterate. Adjustments and tweaks are perfectly normal! And when measured thoughtfully, these tweaks are the things that will get you closer to your desired result.
For example, say you were going to put away 40% of your take home income but realized that didn’t give you enough to take care of basic needs like transportation costs each month. You’d need to adjust your goal. That’s OK! Iterating on a financial plan when you’re measuring your progress (I repeat – when you’re measuring your progress) is a natural part of intelligently getting where you need to go.
4. Repeat the cycle
It’s entirely possible to measure multiple financial goals at the same time. In fact, it’s expected. That said, it’s extremely important to understand how these goals are in conversation with one another.
You can do this by creating a tracking spreadsheet or by signing up for a service that creates a financial dashboard for you (Mint comes to mind). At the end of the day, though, the method is less important than the dedication to keeping it up. A spreadsheet that lies dormant in your Google Drive is of no use to anyone. You may need to experiment a bit before you find your perfect mode of measure.
Ready to Start Measuring?
As I mentioned, the headers listed above might feel shockingly simple. That’s the funny thing about personal finance. Though many personal finance tasks might feel complex beyond reason, there’s often a very simple framework that allows you to take charge of them with confidence. If you can begin to tune into these frameworks (like a trusty measuring system), you'll begin to notice your advantage.
Careful measurement at the beginning of any action or plan allows us to see exactly where we came from and where we’re going. Without that knowledge, you end up operating on guesses alone. And in case you’re wondering, despite my cooking habits, I do follow “recipes” when it comes to personal finance. With much more success than my baked chicken, I’m happy to report.