Obviously driving a car carries a big responsibility. You have to follow the law which protects you and others. You also have to ensure your car is operating effectively and will take you to your destination. Otherwise, a break down on the highway can put you in a dangerous situation.
How do you know if you’re obeying the law and your car is operating effectively? You use indicators such as your miles per hour, gas gage, oil level, temperature and so on. Some cars today even have an electronic compass to help guide your way.
Whether you’re driving a car, or you are the CEO of a major corporation, you use key performance indicators (KPI’s) to get an understanding of the state of things. Personal money management is no different. You need to watch KPI’s regularly so you know you’re making forward progress on your journey. It can also be important to monitor them to insure you’re not endangering your financial situation and your ability to achieve financial goals.
The first thing to keep in mind when establishing KPI’s is you shouldn’t have too many of them. These should be the main indicators your financial house is in order and you’re on track towards your goals. So, let’s look at a few KPI examples:
Budgeting and Spending
I like to look at the area of budgeting and spending first. Great examples of KPI’s in this area are the spending limits you set on categories such as entertainment, food, etc. It’s best to watch spending limits closely on the areas you have the most difficult controlling. I find this to be in the area of entertainment quite often.
First, you need to know what percentage of your spending plan should be focused on entertainment (generally X%). Once established, track your spending (every penny!) each month. At the end of the month, are you on target or off? [Most budgeting software such as Mvelopes Personal allows you to quickly see the amount you’re over on each category as your spending data is entered.]
Based on the measure of over spending (or under in some cases) you should develop a specific actionable plan to correct the issue. For example, maybe you decide to only eat out 1 day per week each month. One dinner will be devoted to a more expensive date night with your spouse and the other dinners will be cheaper fast food options.
Another good KPI is the amount of debt you are carrying. We know lenders use certain measures (debt to income, etc.) to determine their ability to lend you money. But, there is another KPI that is important to watch each month.
My goal is to pay off all debt, but I know I’m definitely going to have a lot of difficulty in making forward progress in other areas of our financial plan if our debt rises above 5% of Net Spendable Income (income after taxes and giving). When it gets above 5% things such as paying extra on debt, savings, etc. will suffer greatly.
If you’re in debt keep an eye on this measure or KPI. Recalculate it each month. It should never go up. It should become lower based on your debt pay off plan. If it’s remaining the same, something else within your budget has to give. Or, you need to generate more income. Ideally, it’s shrinking month by month and after 6 months or a year of time the percentage is almost zero.
Applying the KPI System
These are just too common examples of performance measures that are important to watch each month. Essentially, Christian financial principles tell us we need to be wise financial stewards of God’s resources entrusted to our care. Money management, such as measuring progress each month should be an active process. Remember these important tips to apply the KPI system to your situation:
- Identify your KPI [Hint: budgeting/spending and debt are good starting points, but you can also consider investments depending on the stage of your journey]
- Determine how data will be collected. Again, using budgeting software such as Mvelopes personal or even a personal finance solution such as Mint will help you collect the data.
- Run the reports. If data is being collected properly, you should be able to review reporting from your system. One key tip regarding Mvelopes is my ability to run a report that shows my spending by envelope across the entire year. I can quickly see if my entertainment spending is above my target for the year, thereby raising a red flag.
- Determine how you’re going to correct performance. Again, your plan should be actionable, but also timely. Take specific steps across a given time period to get your performance back in-line with targets.
- Review and review again. Continue to monitor so that you know how you’re doing and can take corrective action early.
You wouldn’t drive without checking the gas gage every so often. Don’t travel your financial journey without reviewing your performance, otherwise, you might wake up years later and find that you haven’t make it around the block.
Do you find such key performance indicators helpful? Do you look at such indicators to check how you’re doing? What other indicators can you think of that can help you along your financial journey?
Photo by bcostin