How Do You Measure Financial Progress?

by Miranda Marquit · 13 comments

We are all at different places when it comes to financial progress. Indeed, some of us may not even measure progress the same way. Just as being “rich” means different things to different people, the way you measure financial progress might vary from the way your neighbor measures it. But it is important to understand how you feel about your finances, and be prepared to measure your progress in a way that works for you. Here are some suggestions of how to do it:

Net Worth

One way to keep track of your financial progress is to track the way that your net worth grows. Your net worth represents the total value of your assets after your liabilities have been subtracted out. This can be a good way to keep track of how close you are to reaching a financial goal, since you can see results as you reduce liabilities and increase your assets.

Income

Some people measure their financial progress by how much money they make. If they can increase their income a little bit each year, they feel as though they are making good financial progress. This does not mean that you have to get a raise from your 9 to 5 job every year; rather, you can work to cultivate additional income streams (from a side business, dividend investments, a web site, or royalties) to help you meet your income goals.

Debt Reduction

For those who are in a great deal of debt, financial progress can be measured by debt reduction. Being in debt can be a rather discouraging thing, so being able to pay it down can be a big help. Choose a method of debt reduction that works for you (the debt snowball is one of the most popular), and set to work. As you pay down your debt — especially when you pay off a loan — you will feel a sense of accomplishment and well being.

Size of Your Nest Egg

Some people are not as concerned with what is going on now as they are with what is likely to happen in the future. If you are building toward a certain goal, the size of your retirement account can be a great indicator of where you are at financially. As you set more money aside, and as your nest egg grows, you can measure your financial progress — and how close you are to your retirement goal.

Comparing Yourself to Others

Of course, one of the the age-old measures of financial progress is still how you stack up, in terms of possessions, to people you associate with. While this is not the best way to gauge your financial progress, it is difficult not to look at what others have (or appear to have) and use that as a measure of ourselves. Unfortunately, measuring your financial progress by how much stuff you have compared to someone else is a short road to ruin. This is especially true if you are basing your estimation of what someone else has by stuff without knowledge of his or her finances. You could be simply racing your neighbor to see who can rack up the most debt, and that doesn’t help anyone.

Take a few minutes to think about what defines financial progress for you, and sort out your financial priorities. Once you have a better idea of what financial progress means for you, you can begin to set solid goals to help you see the progress that helps you on the road to financial freedom.

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{ 13 comments… read them below or add one }

retirebyforty December 14, 2010 at 9:12 am

Personally, net worth and cash flow are the two most important metrics for me. Net worth so I can see where I am and how close I am to my goals. Cash flow to make sure I’m progressing in the right direction.

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Briana @ GBR December 14, 2010 at 10:00 am

All of these are ways I’m going to be judging my wealth in 2011. Looking to increase everything except the debt

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marci December 14, 2010 at 10:38 am

Earlier in life, progress was seeing how soon I would reach debt-free. Keeping track of net worth, cash flow, and goals. It was also about fine-tuning MY attitude about what is “enough”…. and being content :)

Once there, including the house paid off, progress was building up my nest egg and funding retirement.

Then progress was getting free financial strategies, free workshops, and free spreadsheets that told me I had arrived at my goals, and then some. Updating the house to last 50 more years – windows, roof, plumbing, electrical, floors, etc was also done so I don’t have to hopefully spend on them in my retirement years.

Now financial progress in retirement, is holding on to to what I have, making what I spend go as far as possible, spending as little as possible, and enjoying time, precious time, and life to the fullest.

My outlook on Financial progress has changed as I have aged :)

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WinWithMoney December 15, 2010 at 8:33 am

Great post. Good comments too, reflecting that one measure may be better than another depending on where you are on your personal financial path. I think it is important to use each of these to some extent in order to fully understand where we are at financially, but I always come back to Net Worth to tell me from a big picture perspective whether or not I am headed in the right direction.

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marci December 15, 2010 at 10:45 am

Agree that Net Worth is probably the best tool….for the overall picture.
I used to figure this twice a year – in January when doing taxes, and in July just as a check on progress :) Now (debt free) once a year is enough.

Once you are debt free, it’s probably all you need to worry about.
But before that, the cash-flow rears it’s ugly head from time to time – gotta have enough to make the payments til one is out of debt and has the utilities and recurring insurance, taxes, etc. covered.

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Blue Spyder December 15, 2010 at 1:04 pm

I look at my progress from a standpoint of debt reduction and nest egg growth. My income, due to changing freight availability, can fluctuate month to month, so as long as debt is shrinking and nest egg grows, I’m very happy.

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Moneywise December 17, 2010 at 7:47 am

I came across an interesting slide the other day which dealt with the simple questions “How to get rich” and the answer was simply expenses<income

Though extremely simplified we tend to overlook this very simple fact while planning for financial independence. As for measuring the growth, i currently do not have any debt so currently it is the nest egg that i think would be a parameter for me. I have set a lot of short term and long term targets as part of the nest egg and everytime i manage to cancel one, i feel i am making progress

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krantcents December 19, 2010 at 5:38 pm

I measure my progress by income and investment portfolio growth. Normally, I would use net worth, but the housing bubble changed that. My net worth is growing, but thanks to a conservative approach. Now I am working on increasing my income.

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MortgagesByMark December 20, 2010 at 8:13 am

I think the best measure of progress is how long you can survive without working a job. If you have enough passive income to cover all of your expenses, whether it’s from rental real estate, dividends, or a business that is largely running itself, you’ve made it. If you make $500K/year salary but only have enough money to survive a few months if you lose your job, you are low on the progress scale.

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Sharron Clemons December 21, 2010 at 12:54 pm

Agree that Net Worth is probably the best tool….for the overall picture. I used to figure this twice a year – in January when doing taxes, and in July just as a check on progress :) Now (debt free) once a year is enough. Once you are debt free, it’s probably all you need to worry about. But before that, the cash-flow rears it’s ugly head from time to time – gotta have enough to make the payments til one is out of debt and has the utilities and recurring insurance, taxes, etc. covered.

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Financial Samurai December 29, 2010 at 10:56 am

I guess it’s a spreadsheet I have. I take a look at it once a quarter to make sure I’m not off track. Otherwise, financial progress is more of a lifestyle choice, b/c once you’ve set things in place, you don’t really need to do much of anything to change.

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Jenny @ Frugal Guru Guide April 12, 2013 at 8:34 am

For us, it’s #1-4. (We still have mortgage debt.) #5 is dangerous. There are always people who do much worse than you to make you feel complacent and people who do better to make you feel envious.

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AJ November 28, 2013 at 2:24 pm

I try not to compare myself to others. We all have different goals and ways. For instance, one friend makes about the same as me but is very generous to friends and family. She puts relationships above wealth. It works for her.

I do compare myself to myself. At least once a year, I update a networth/budget spreadsheet to see if I’m heading in the right direction. It includes current and retirement income/expenses, as well as totals in investments.

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