What drives your progress toward financial freedom? Which numbers should you monitor to accelerate your journey to financial independence?
Understanding and tracking personal finance metrics is crucial for building wealth. In his book Set for Life, Scott Trench contends that three key measurements—net worth, spending, and income—serve as your financial compass, helping you navigate the path to lasting prosperity.
Keep reading to discover how monitoring these essential numbers can transform your financial future and speed up your journey to independence.
Personal Finance Metrics
Trench identifies three personal finance metrics to track to help you improve and speed up your progress toward financial freedom: your net worth, spending, and income.
Net worth: Net worth is the total value of what you own minus what you owe. To calculate your net worth, subtract your total debts from your total assets—which are things you own like your investments, rental properties, and businesses. Trench recommends you only include assets that generate income or reliably appreciate (increase in value over time). Things like home equity, cars, and retirement accounts that don’t directly generate usable wealth shouldn’t count toward your net worth.
Spending: Trench suggests you track how you spend your money with software that automatically records and categorizes every expense. There are two types of expenses: fixed expenses (like rent, insurance, and loan payments) that stay the same each month, and variable expenses (like groceries, entertainment, and shopping) that change month to month. Review your spending monthly to spot areas of waste. The goal is to paint a clear picture of your lifestyle cost so you know how much passive income you’ll need to sustain it.
(Shortform note: How much should you spend on fixed expenses versus variable expenses? In I Will Teach You to Be Rich, Ramit Sethi provides tips for planning your spending, suggesting you allocate 50-60% of your take-home pay for fixed expenses and 20 to 35% for variable expenses—which Sethi refers to as guilt-free spending. The rest of your income can go toward things like investments and savings. Sethi also recommends using software to track your finances and provides a list of tools and advice for using each tool.)
Income: Your income is the money you receive regularly from various sources. Record it to see your financial progress and get a clear picture of your money situation. Trench suggests you break it down between active income (like jobs and side hustles) and passive income (like investments and rental properties).
Trench explains that, when your assets generate more income than what you spend each month, with a healthy buffer, you’ve reached financial freedom.
(Shortform note: The average millionaire has seven different sources of income. These sources typically include job income, stock dividends, money from rental properties, intellectual property royalties, profits from selling appreciated assets, business earnings, and interest from savings or loans. Recording your income as Trench suggests can be a helpful first step to building the multiple income streams for reaching financial freedom more quickly.)
| Things to Consider When Calculating Net Worth Other financial experts provide more detailed guidance for calculating your net worth. In Rich Dad Poor Dad, Robert Kiyosaki also defines assets as things you own that generate income. But he cautions that some things may seem like assets when they’re actually liabilities—things that lose money over time or incur large expenses. These include a house used as your primary residence and expensive things like luxury cars and handbags. However, some financial experts include cars and homes because they have a market value although they don’t necessarily generate income. In Your Money or Your Life, Vicki Robin and Joe Dominguez provide an extensive list of income sources you can gather to identify your debts and assets. The list includes everything from tax returns and bank statements to money you received as gifts. They say that calculating your net worth may take you a few days, but understanding how much money has come into your life is crucial for knowing how to budget it. |
Now that you understand how to track these three personal finance metrics and monitor your financial situation, you can begin taking concrete steps toward financial freedom.
