Monitoring Your Financial Independence

When driving from your home to a location you’ve never been before, how do you get there?  In today’s world, you plug the address in your car’s navigation system, and based upon the parameters you select, it will tell you how to get there.   More fancy GPS systems also have available:

• The estimated time of arrival.  This is based upon the route chosen, speed limits on the roads to travel, and your previous average speed.
• Possible alternative methods to get to your destination (the super fancy ones have real time traffic info)
• The ability to stop at points of interest (i.e. gas station)

Along the way you can make adjustments to your route and the GPS will adjust accordingly.  If you get off track your nagging GPS back seat driver will tell you “Please make the next available U-turn”.  With the magic of computer technology, you eventually arrive at your destination.  All of this would not be possible if it weren’t for the GPS monitoring important metrics: your location on the earth, direction, and speed.  This metaphor should be used for becoming financially independent.

What metrics should you be monitoring to achieve financial independence?  After all if you aren’t monitoring your goals, how do you know you are going to get there?  I recommend setting up an Excel spreadsheet, and enter the information on a yearly basis.  Here is the information I use to monitor our family’s progress:

• Year End – The year the below information is filled out
• Age – Your age
• Net Worth – The total amount of your net worth.  I do my total assets minus my liabilities.  Even though your primary residence is not an asset, I include it in my calculations.
• Net Worth Change – The difference in your net worth from the year prior.
• Net Worth % Change – The percentage your net worth changed from the year prior
• Net Income – The total amount of income earned from active (i.e. employment) and passive (dividend stocks).  I do not use the government’s AGI formula.  I use the raw net income before any tax deductions.
• Net Income Change – The difference in your income from the previous year.
• Net Income % Change – The percentage your income changed from the year prior
• Amount Saved – The total amount saved in that year.  Include tax differed (i.e. 401k) and taxable accounts.
• % Saved – The amount saved in percentage to your net income
• Total Taxes – The amount of federal, state and local taxes you paid.
• Effective Tax Rate – This is your net income divided by your total taxes.

Once you start recording this information on a yearly basis, you can start asking questions like:

• Has my income kept up with the inflation rate? If anything it should surpass inflation by a wide margin
• Am I saving enough? Am I saving too much?
• How is my effective tax rate compared to my peers?  This will become a more important issue in the future as taxes increase.   It’s not how much you make, it’s how much you keep that’s important.
• Most importantly, at what age will I reach financial independence? Am I on the fast track, or did I hit a major roadblock?

Once you start collecting this data over time you’ll have great nuggets of information.  This can help predict future numbers and show progression.

Some other possible metrics to monitor:

• Amount of consumer debt
• Amount of passive income
• Yearly expenses – Which can help track your estimate for if and when you retire.  I would exclude unusual, one time expenses (i.e. home remodeling)

Readers: Do you have any other suggested metrics to monitor?  Would you be interested in a pre-made Excel spreadsheet that had all of the fields and calculations already made for you?