If you really get into the personal finance community, you’ll find there are more opinions than people when it comes to your financial statistics. Each writer has a different way to compute key stats: savings rates, tax rates, net worth, targets – it’s enough nuance to scare a lot of newcomers.
I’m here to assuage your fears a little bit: don’t overthink your financial statistics. As long as your financial statistics crunching is mostly valid, tracking it in the same way over time will give you an excellent look at your trends.
Pots and Kettles?
When we say Personal Finance is Personal, we’re not being ironic. Yes, we panned the phrase here on the site – but when it comes to tracking your results over time, the journey is way more important than the odometer. Sure, don’t remove the odometer from the car – but just as various things like tire pressure, temperature, and wheel radius all can make your true mileage differ from the odometer (and speed from the speedometer), those instruments are best regarded as an acceptably accurate gauge. (Your GPS will give you more accurate speeds than the odometer, for example…)
To hang a lampshade on it – your income is like the speedometer, and your net worth is like the odometer. (Sorry if it was obvious.)
And don’t forget the quote from John Maynard Keynes: “it’s better to be roughly right than completely wrong”.
Don’t Overthink Your Financial Statistics… Okay, Then What?
What about the journey? And how do I track my progress?
Well, the ultimate goal is obvious – it’s something like Retirement or Financial Independence. As for the odometer and the speedometer, I do think you should try to track your process – 99% of the time, it’s a necessary step in your journey. But here’s where I differ from many in my belief: instead of trying to fit your methodology to whatever is in vogue at the time, do a bit of research up front, pick a method, and stick to it.
For me currently, that means my personal net worth tracking is basically Mint.com’s algorithm – which, yes, includes the Zillow value of real estate and my primary residence. That obviously differs from, say, the rules for accredited investing, for example – but you’ll only go crazy if you change your measurement to whatever is in style. If you’ve got a reasonable method, stick with it – it’s the only way to truly know if your numbers are increasing over time. (Or, if you’re in retirement – decreasing at a reasonable rate!).
Look, personal finance is an incredibly long commitment – a marathon, not a sprint. Arguing with yourself over how to calculate your net worth or your income from year to year is like fiddling with your watch for the first mile.
Get into the habit of tracking financial statistics in a uniform way, at a uniform cadence.
And watch your net worth go up and to the right.
(And if you do want guidance on how to compute your savings rate, we can help.)