In setting our goals, it is important that we are able to monitor and assess with the help of metrics. Metrics is a method of measuring something, or the results obtained from this. Here are the 4 Key Metrics we would like to introduce to help us go to the next stages of wealth.
Savings refers to cash that we have. To check your savings, you may simply check at your pockets, wallets, bank accounts, or virtual wallets. If you have bank account and virtual wallets, you will find it tedious to check you savings as you will have to log in and check their balances.
The best way to keep in touch with your total savings is to have a personal finance management app. It can either be in Excel, Google Sheets, or a mobile app. Savings are usually computed monthly but with the help of finance management app, we will be able see our current balance.
Formula to compute the savings:
Beginning Balance + Income – Expenses = Ending Balance
Beginning Balance is the Savings before cash went in or out.
Income is the money going in.
Expenses is the money going out.
Ending Balance will be the Beginning Balance for the next month. The app will show this in our Savings metrics.
In order to increase Savings, we should be looking for more income and/or decreasing expenses. It is the most important metrics as this will greatly impact our spending and investing decisions. Additionally, note that Savings is always positive as it only corresponds to our available cash. Loans and debts are on a separate account and are not considered in computing our Savings metrics.
Cash Flow is how much money is flowing in our accounts. This will measure the difference between our income and expenses. A negative Cash Flow means that we are draining our savings. As much as possible we should keep our Cash Flow positive.
Formula to compute for Cash Flow:
Income – Expenses = Cash Flow
To make sure that we will always have a positive Cash Flow, it is important that we budget for the short term and the medium term. The short term is the daily planning of income and expenses. This will help us plan how much cash should we hold on to cover the expenses up to the next pay day. It is specially useful when getting out of debt and still have loans to pay to be able to add payments as much as we can.
The medium term cash flow planning will help us plan ahead for the coming celebrations for the year. We have various celebrations and seasons in every month so it is useful that we get to plan ahead of the short term as well. Although if you will not want to celebrate anything, feel free to disregard medium term planning.
Net Worth measures how much we are today in terms of balance sheet.
Formula to compute for Net Worth:
Assets – Liabilities = Net Worth
This is not really meant to measure our value as a person since there are some assets we have that are priceless such as education, skills, talents, etc. It only measures our financial value. Having positive net worth means that we either don’t have debts or that we can easily pay our debts with our assets at anytime.
Passive Income Percentage
Passive Income Percentage measures how much of our current expenses are being covered by our passive income. This shows value in percentage.
Formula to compute for Passive Income Percentage:
(Passive Income / Current Expenses) * 100% = Passive Income Percentage
Say our current monthly expenses is 20,000 and our assets generate 2,000 passive income. Our passive income percentage is 10%.