8 Key Metrics to Assess Your Financial Well-Being

8 Key Metrics to Assess Your Financial Well-Being

Last week I wrote about seven frameworks to analyze your entire life and overall well-being. But what if you’re not interested in your overall well-being and just want personal finance specific frameworks?  

You’re in luck. We have some metrics you can use to assess your financial well-being.

Metrics to Assess Your Financial Health

Below are the best ways to think about your personal finances. You can analyze, track, and assess your financial health and wellness with these metrics. Run the numbers, and see how you are doing.

1. Income and Expenses

The simplest framework for understanding your monthly and yearly finances is to understand your income and your expenses. To put together this list, simply put your income in one spreadsheet (or column of a spreadsheet) and your expenses for that same time period in another.  

If you’ve never created a budget before, this is the best place to start because it’s even easier than budgeting. It is as basic as understanding what money you are earning and what you are spending.

Pro tip: If you’re a bit more advanced, start tracking this quarterly or yearly. How has your income changed over time? How have your expenses changed? 

2. Free Cash Flow

As it relates to your personal finances, free cash flow is simply how much cash you have available to spend or save in any given month. Essentially, it’s how much is left over (or how much you’ve overspent) after you have paid all of your expenses.

To calculate your personal free cash flow for the month, take your monthly income (after tax is easiest) and subtract your monthly expenses. You’ll want this number to be positive, not negative.

Pro tip: Monitoring your free cash flow can help you ensure you are not going into debt.

3. Net Worth 

Your net worth is another excellent way of tracking your overall financial well-being. Your net worth is the amount of all of the savings and tangible assets you have minus your debts. This is also known as your assets minus your liabilities.

Your assets can include things like the value of all of your savings and retirement accounts, your checking accounts, and any cars or real estate you own. You can also include any super valuable personal property, like jewelry or collectibles, if you’d like.

Your liabilities include all of the money you owe to others, be it credit card debts, student loans, mortgage(s), car loans, or personal loans.

Pro tip: Over time, you want this number to grow.

4. Emergency Savings 

Your total available emergency savings is another key financial framework that can help you analyze your financial health. An emergency savings account is money you don’t touch unless there is an emergency. 

For example, if you need a new furnace or you lose your job, an emergency fund can help. Most financial experts recommend setting aside 3-6 months of your total living expenses in a savings account used only for emergencies. Some people prefer to have a full year set aside in case the unexpected happens. 

Pro tip: If you don’t have an emergency savings account yet, a good first step is to start building an emergency fund. Work on growing your fund to an amount that will cover 3-6 worth of expenses. 

5. Safety Net

The safety net concept is how well you are covered in the event of an emergency beyond a basic emergency fund. To understanding this aspect of your financial health, calculate the following:

  • Health Insurance: Do you have health insurance? What is your maximum lifetime benefit under your current policy?
  • Disability Insurance: Are you covered by a disability insurance policy through your employer? If so, how much and for how long will it cover you? If you aren’t covered, should you buy your own policy?
  • House/Renters Insurance: Do you have the appropriate amount of home/renters insurance?
  • Car Insurance: What are the policy coverage amounts for your car insurance? If your net worth has increased since you first bought the policy, you may want to revisit and purchase more insurance at this time.
  • Umbrella Insurance Policy: Umbrella insurance is another good policy to have as your overall net worth grows. An umbrella insurance policy (typically) kicks in when your car or homeowners insurance (for example) policies have reached their max. Umbrella policies are generally pretty cheap, sometimes around $100-$200 for a $1,000,000 policy, so they are worth purchasing.
  • Life Insurance: Do you have 10x your salary in a term life insurance policy? If you have dependents, this is the recommendation.
  • Health Care Directive/Power of Attorney: Have you set up a health care directive and power of attorney in case anything happens to you?
  • Will: Do you have a will that explains what happens to your property when you die?

Pro tip: The “safety net” framework is perhaps the hardest to consider. No one wants to spend their time thinking about or planning for what may go wrong in their lives. But it is arguably one of the most important to your overall financial well being. Take the time to create your safety net.

6. Retirement Savings

Most of us dream about the day when we can retire. But how prepared are you for retirement? Be honest with yourself. Use a comprehensive retirement calculator.

Pro tip: My current favorite calculator is from Fidelity. If you don’t have a Fidelity account, you can sign up for a free guest account to use the calculator.

7. Percentage of Goals Funded

What money goals have you set for yourself? Is there a particular item you are saving for? What about a vacation? A down payment for a house or a new car? Whatever your goals, keep track of them and work on reaching 100%.  

Pro tip: Make sure you set goals that stick and track monthly how close you are to reaching them.

8. Automatic Income Framework

As you begin to take greater control of your finances, you may be interested in generating “automatic” income. Automatic income can be dividends, interest payments, or a side business that is fairly self-sufficient.

Understanding how much income you generate each month without having to work a traditional job can be a good metric by which to view your finances.

Pro tip: Once you grow your automatic income to be greater than your monthly expenses, you have reached financial independence.

The Bottom Line

All of the personal finance metrics above can and should be calculated to understand your financial well being. Choose the concepts that work best for you and run your own calculations to assess your overall financial health. Better yet, start a spreadsheet and track the calculations monthly, quarterly, or yearly to see how they change. 

What financial metrics do you track regularly?