How many of your dreams would come true without money? Chances are at least some of your goals require some financing. The only way to get there is to be proactive and get on your money goals.
Money goals help you to live intentionally and keep your eye on the prize. In the Mindframe Blog, I advocate for setting goals and being purposeful to achieve the lifestyle you want.
Goals without metrics and targets are just aspirations. You must set clear metrics and track your progress to make your money goals come true.
The point is to get a pulse on your finances to track your progress and course-correct when things are not looking right.
Checking your account balance is one thing, but often things are a bit more complicated. So whether you can’t tell the difference between checking and savings or if you are a seasoned stock trader, I’m sure this list below will help you set money goals.
Disclaimer: The financial information provided on this page is for educational purposes only. Mindframe does not offer advisory or brokerage services or recommend or advise readers to buy or sell particular stocks, securities, or other investments. We recommend talking to a fiduciary financial planner before making changes that impact your finances.
Table of Contents
Creditworthiness
Creditworthiness is your ability to borrow money, such as a mortgage, student loan, car loan, etc. It is sometimes used to measure your reliability and can even impact renting an apartment or securing a job. Therefore, staying on top of your credit is essential to your financial hygiene.
Credit Score
The credit score is calculated differently in different countries and is more critical in some countries than others. A credit score is an essential metric for lenders and landlords in the US. If your score needs love, set a money goal around it!
To get your score, you are entitled to get a free copy of your credit reports once a year from each of the three credit bureaus on AnnualCreditReport.com. You should know that directly inquiring about your credit frequently will negatively impact your score. Therefore, you might be better off using a web service like Credit Karma or Rocket Money or your bank’s offer, such as Chase’s Credit Journey.
Credit Utilization Ratio
Your credit cards have a maximum limit you can spend on the card. How you use your credit cards is one factor impacting your Credit Score. Low utilization and paying your cards off on time can improve your credit score.
The Credit Utilization Ratio is calculated by dividing the balance on your card by the limit on it. The ratio matters for each card, so it may be a good habit to track each separately. But to keep things simple, you can also create a combined money goal by taking the total balance and divide by the combined limit on all cards.
If you have a habit of accumulating balance on your credit cards, set a money goal to keep your credit utilization ratio below 30%. You can use a free calculator like the one on Bankrate to calculate your credit utilization ratio.
Debt-to-Income Ratio (DTI)
Debt-to-Income Ratio is one of the metrics lenders use to decide how much they will lend you. See DTI under the Spending section for more details.
Financial Independence
Financial Independence (FI) is THE money goal for millions of people. Being financially independent means you are at a point where you can cover living expenses for the rest of your life without having to work or rely on others. Reaching financial independence allows you to focus on things you want and have a sense of financial security.
Emergency Readiness (ER)
You know how it is. Life has a tendency to sometimes smack you with a surprise or two. Losing your job, a transmission breaking down, or a roof caving in can destroy your money goals.
Emergency readiness is the number of months you can cover living out-of-pocket. Calculate it by dividing your emergency savings (cash put aside for emergencies) by your Average Monthly Expenses (see above). This will show how many months you can survive without reaching out to other accounts or taking on a loan. The conventional recommendation is to have 6 months saved up, but some might require more, and others might be ok with less.
FI Number
FI Number shows how much your investment portfolio needs to cover living expenses. It’s based on the 4% rule devised by Bill Bengen in 1994, which proposes that it is statistically safe to withdraw 4% from your investments annually and keep investments stable with inflation. To calculate your FI number, multiply your average annual expenses by 25. If you know you will have some more significant expenses coming up you are also saving for, then it might be easiest to use a calculator like the one on Millenial Money.
FI Ratio
The Financial Independence Ratio is a percentage showing how far along you are to reaching your FI Number. It is calculated by dividing your Net Worth by your FI Number. It can be misleading, though. For example, even if you are at 100%, living off of annual withdrawals might not be possible if a lot of your net worth is tied to illiquid assets, like a home or private company stock. To circumvent this, you might use your Liquid Net Worth instead.
Passive Income Ratio (Income Independence)
The Passive Income Ratio, or income independence, shows how much of your income is earned passively. Passive income is money you earn without spending time making it. Classic examples are, for example, dividends on stock investments and, to a lesser degree, rental income from a property.
Many people who reach financial independence combine passive income and cover the rest with investment withdrawals (see FI Number). Calculate your passive income ratio by summing up your annual passive income (dividends, distributions, etc.) and dividing it by your total annual income.
Years to FI
The time it takes to get to financial independence depends on how much you can put aside to invest and how much you already have saved. It is easiest to calculate Years to FI using one of many free online calculators, such as Fidelity, Millenial Money, or Money Under 30.
Income
Increasing your income might have the most significant impact on meeting your money goals faster. Still, it is often talked about less than saving and investing. If you want to crush your life goals, maybe set a money goal around making a higher income.
Passive Income
Passive income is the amount of money you make without spending your time. “Passivity” is a bit of a scale, where at one end is your paycheck from work (not passive), and at the other are, for example, stock investments (entirely passive). Somewhere in between lie things like rental income, where earning the income might not be a full-time job but still requires some effort. Passive income is an important financial goal for many people who look to be financially independent. Even many who work have a goal around passive income to increase their overall income.
Real Income Growth
Real income growth indicates if your income is keeping up and growing faster than inflation. To calculate it, sum up your income from the past 12 months and divide it by income in the previous 12 months before that. Subtract the inflation rate, which in the US is 2-3% over a long period. If the result is positive, your income is growing faster than inflation, and you are increasing your income. If the result is negative, then you are losing purchasing power.
Effective Hourly Pay
Effective hourly pay shows how much your time is worth. Consider the money you make and divide it by the amount of time you spend to produce that income. This is not just the active time spent working but also time spent commuting, mentally transitioning from work, etc. It helps understand how much you make per hour of your attention focused on your work. Knowing your effective hourly pay can make it easier to give a price on the time you spend on side gigs or tasks that you could delegate to someone else (cleaner, virtual assistant, etc.).
Investments
The pathway to achieving many life goals is enabled by letting your savings grow over time. Tracking investments can be complicated, and the jargon can feel overwhelming. So I’m trying to introduce you to some of the most popular metrics to help you set your investment goals.
Expense Ratio
Expense Ratio helps you measure how much you are paying for your investments. Many investment assets (such as ETFs, Mutual Funds, etc.) and some investment accounts incur annual fees. You will likely be charged a management fee if you have a portfolio manager. The expense ratio is calculated by dividing the total annual expenses by the value of your investments. Your brokerage account might have a tool to see your expense ratio, or you can use a free service like Personal Capital. If you want to do it manually, you can find your total annual expenses by checking the websites of your investment products and/or asking your portfolio manager. You can also calculate it by summing up the payment transactions on your brokerage account.
Performance Against Index
Markets go up and down, and therefore performance is often relative. For example, many investors’ portfolios lose money in a down market, but some do better than others. This is done by comparing against an index (S&P 500, Dow Jones Industrial Average, Nasdaq Composite, Nikkei 225, FTSE 100, STOXX 600, etc.) or an index portfolio, which are imaginary baskets of investments with associated fees. Index performance is challenging to calculate manually; therefore, the best way to do it is to use a free service like Personal Capital. Your online bank also may include some handy tools.
Total Return (Rate of Return, ROR)
The total return of an investment or portfolio includes the appreciation in the value of the investment itself as well as the yield (see below) and expenses (see above). First, calculate the appreciation of your investment by taking the current investment value and subtracting from it the value in the past (for example beginning of the year or a year ago). Then add to the yield the investment has generated and subtract the expenses and taxes over the same period. Finally, divide by the investment value in the beginning and multiply by 100 to get a percentage.
Total Return (Real)
Real total return measures the investments’ gain or loss in purchasing power. Inflation, the ever-increasing prices of things, slowly makes it so that your money buys less each year. Calculate your Total Return (above) and then deduct from it inflation to get the real total return as a percentage. In the US, long-term average annual inflation is in the 2-3% range.
Yield
Yield is the income return on investment. For example, your investments might earn you dividends, distributions, or rental income if you own stocks, bonds, or real estate. Yield is a percentage calculated by dividing the total sum of cash earned by the current value of the investments.
Savings
A dollar saved is more than a dollar earned because a saved dollar is a tax-free dollar. Staying on top of your spending and socking away money is essential for getting out of debt and ultimately meeting your life goals. Here are some metrics to track to ensure you are investing in yourself.
Savings Amount (Cash Flow)
Savings amount is a tremendous overall top-line measure that can be measured by measuring your “net cash flow.” Net cash flow is calculated over your accounts by summing their total cash inflows (deposits) and outflows (withdrawals), for example, over a month. If your cash flow is positive, it means you saved money that month. If you choose to do this over just some of your accounts, you may want to consider how to include transfers you made to and from your other accounts. Some free apps, such as Personal Capital and Mint, can help you track by linking your accounts.
Savings Buckets (Envelopes)
Saving buckets is a concept where every dollar saved is bucketed towards some purpose, such as a financial goal or spending category. Money sitting in a bank account can feel abstract, but when bucketed, it will feel more personal to save and spend wisely. Some have set up saving buckets manually by opening multiple checking or savings accounts. However, it may be easier to use an app like YNAB to bucket your money virtually. Some banks, such as Ally and SoFi, also offer bucketing as a feature.
Savings Rate
The savings rate, sometimes called Savings-to-Income Ratio (STI), is the percentage of your income you save. It is calculated by dividing your monthly savings by your gross income (income before tax and other deductions). You should be able to find your gross income in your pay stub. Multiply the result by 100 to get a percentage. Most conventional recommendations are to save 15-20% of your income, while others find it out of reach, and others (like those who subscribe to the FIRE community) aim for much higher rates. Note that most apps measure the net savings rate instead (see below).
Savings Rate (Net)
Similar to Savings Rate above, some people prefer to measure their savings rate based on the take-home-pay (net income) instead of before tax and deductions income (gross). Most apps use the net savings rate since they lack information on your taxes and deductions. It may be inaccurate if you include tax-deferred contributions, such as savings, to your 401(k), IRA, HSA, or FSA accounts.
Spending
Spending and saving are the two peas in a pot. Your hard-earned money should be there for you to enable you to live the life you want, but all of us have to spend within our money goals. Staying on top of your spending habits is key to making your dreams come true.
Average Monthly Expenses
Knowing your monthly budget is essential to stay on budget but is also a component of measuring things like your FI Number (above). You can estimate your monthly expenses by summing up all the payments in your account statement. Sum up the last six months and take the average for a reasonable estimate. Six months of expenses should give you a reasonably good idea of how much you spend monthly. Many budgeting apps can help you to track your monthly expenses, such as YNAB and Mint.
Debt-to-Income Ratio (DTI)
DTI measures how much of your income goes towards paying off your debt (such as a mortgage, rent, credit card payments, etc.). Debt-to-Income ratio is sometimes divided into looking at just housing costs (called “front-end DTI”) or all debt payments (“back-end DTI”). Calculate your debt-to-income ratio by dividing your monthly debt payments by your income before taxes and deductions (gross income). You can find your gross income from your pay stub.
Discretionary Spending
Discretionary spending is the amount you spend beyond your essential living costs (housing, utilities, food, etc.). Setting goals around discretionary spending can help you stay on top of your shopping, going out, vacations, and other costs that are under your discretion. Apps that categorize your spending, such as YNAB and Mint, help track discretionary spending.
Non-Discretionary Spending
The inverse of discretionary spending (see above).
Living Within Means Index (LWI)
LWI (by Bassam Salem) is a percentage that describes whether you can cover your essential monthly expenses, like housing, utilities, food, etc. To calculate LWI, divide your monthly take-home pay by your non-discretionary spending and multiply by 100. A number over 100% indicates you can cover your essential living month-to-month. If your number comes below 100%, you are underwater, which might be a sign to cut your spending and/or increase your income. Note that even at 100%, you still live paycheck-to-paycheck and may lose money if you have discretionary spending. For a related metric, see Cash Flow.
Personal Inflation Rate (PI)
The personal inflation rate shows how much your spending has increased in a year. The PI rate can indicate if your spending habits have changed or how much overall inflation (price increase) has impacted you (if your spending habits haven’t changed). Calculate your personal inflation rate by subtracting your total monthly spending from a year ago from your monthly spending now. Many apps that offer budget trackings, such as YNAB and Mint, allow you to look past months, which will come in handy in tracking the personal inflation rate.
Spending Categories
To go deeper into budgeting and living within your means, many find it helpful to budget spending within categories, such as housing, transportation, food, utilities, healthcare, insurance, debt payments, personal spending, subscriptions, etc. The easiest way is to link your accounts to an app like YNAB, Rocket Money, Goodbudget, or Mint. You can also do this manually by reviewing your account statement from the past 3-12 months and categorizing each transaction in a spreadsheet.
Wealth
I would argue wealth should not be a goal in itself but accumulating wealth enables many money goals, such as financial independence. So here are a couple metrics that can help you track your wealth.
Net Worth
Net worth is a measure of how much you own or owe. It is a high-level metric showing how you’re doing but won’t reveal much insight into the reasons for your financial performance. It is measured as total assets (things you own) minus your total liabilities (things you owe). Assets are things like your bank accounts, investments, the value of your home, etc. Liabilities are loans (including mortgages), credit card balances, and so on. It is fairly simple to calculate manually but you can also use various apps, like Personal Capital, Rocket Money, and YNAB, to track it.
Net Worth (Liquid)
Liquid net worth is similar to Net Worth, but you count only assets that are cash or quick to sell (liquidate) to cash, such as stock, bonds, etc. The point of measuring liquid net worth is often used to evaluate the ability to tolerate risk. For example, someone whose only asset is a valuable home (they would be “house poor”) could be at risk if suddenly hit by a surprise bill.
Relative Wealth Index (RWI)
RWI (by Bassam Salem) measures whether you can afford to own the consumable assets that contribute to your lifestyle, such as your home, car, etc. Calculate your RWI by dividing your Net Worth by the total value of assets that you use to live your life. RWI of 100% or above means you can afford the assets (even if you don’t), giving you peace of mind and can help you know when to start investing for aspirational goals versus securing your existing lifestyle.
Conclusion
Your money goals and journey to get there will look different from everyone else. The most important thing is to get started and know where you are on that journey. I hope the dozens of metrics above help you be in control of your finances and visualize the progress you are making every day to make your money goals come true.
I would love to hear what you think of the list. Let me know if there are metrics you track that I missed here or what your money goals are. Reach out to me on the About page.