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Metrics for your household finances

This article was written by in Personal Finance. 1 comment.

It’s the heart of the baseball season and, whereas 20 years ago talk about the sport would have centered on the All-Star Game, the trade deadline, and how the pennant races were shaping up, now the chatter is filled with terms like “Wins Above Replacement” and “Defense-Independent ERA.” For better or worse, advanced metrics have taken hold in baseball.

What is interesting about the transformation of so many sports nuts into statistics geeks is that Americans don’t generally apply the same quantitative rigor to their household finances. That’s a shame, because finance is far more suited to statistical analysis than baseball, and the right set of numbers can give you a clear, objective view of your financial condition. For example, here are a dozen metrics that could give you some valuable financial insight:

Wage growth. Obviously, how much you make is important, but the rate of change tells you where you are headed. If your wage growth is not keeping pace with inflation, then you are headed in the wrong direction. In contrast, if your wage growth is up in the high-single digit percentage range, you should be on your way to a wealthier future, even if you still have a ways to go at the moment.

Total compensation growth. While your wages have the most immediate impact on your lifestyle, don’t neglect the importance of benefits — things like 401(k) matching contributions, healthcare benefits, and other extras your employer might provide. People tend to take these benefits for granted when they have them, but they certainly miss them when they don’t. So, you should factor benefits into the value of any compensation package. Nationally, the total compensation growth rate fell to a low of 1.4 percent shortly after the Great Recession, but recently recovered to a six-year high of 2.6 percent, which is still somewhat meager.

After-tax growth. While pre-tax compensation measures how much you earn, it is after-tax compensation that really affects your lifestyle. If after-tax growth is lagging badly behind pre-tax growth, think about what you could do (e.g., tracking deductions better, moving to an area with lower taxes) to stop taxes from taking an ever-growing bite out of your income.

Spending growth. It’s bad enough if you have trouble making ends meet now; but if your spending is growing faster than your after-tax income, then you are on course for real trouble.

Savings growth. This is a reality check for the income and spending growth measurements. If income appears to be growing faster than spending, you should check to see if this is showing tangible results in the form of an increasing rate of savings growth.

Current net worth. An important measure of your financial progress is to tally up the current net value of everything you own. Two things to remember about doing this. First, the “net” part of this is very important — you have to subtract the amount of debt you owe from the value of any assets. Second, when you consider the value of any tax-deferred retirement savings, keep in mind you are likely to have to pay taxes on those savings when you ultimately access them.

Net worth growth rate. Financially, where you are now is often less important than where you are heading and the rate at which you are getting there.

Debt-to-income ratio. Having some debt can be a normal part of financial management, but the larger that debt grows to be relative to your income, the more you risk it getting out of control.

Debt-to-asset ratio. On a net worth basis, there may be little difference between having virtually no assets or debt on the one hand or having a large asset value offset by an equally large debt burden. However, the latter is riskier, because a setback in the value of your assets could suddenly leave you with a significantly negative net worth.

Retirement savings rate. The percentage of your income you put aside for retirement savings may start out small early in your career, but you should strive to get it into the double digits by the time you reach 30.

Projected retirement income. Use a retirement calculator to project what retirement income your savings program would produce. This will give you a glimpse of the lifestyle you are on track for at your current pace.

Projected retirement income gap. If your projected retirement income does not seem adequate for the lifestyle you want, measure how far it falls short and start to figure out how to close that gap.

No one statistic is the answer to assessing how healthy your finances are. Instead, these statistics are pieces of a mosaic giving you a glimpse at part of the picture. If sports fans these days can spend so much time obsessing over statistics, a little quantitative examination of your finances now and then shouldn’t be too big a burden.


Updated July 30, 2015 and originally published July 17, 2015. If you enjoyed this article receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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avatar 1 Anonymous

Hi Richard,

These are helpful metrics. I haven’t used a whole lot of metrics before but I am starting to utilize some of the basic ones. Always something to improve. Thanks for the insight.

Laura Beth

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