How to Measure Your Money Management Skills

1. How to Measure Your Money Management Skills There are plenty of methods and techniques you can use to improve your financial standing, but we sometimes overlook the obvious – what's the best way to measure your results? When you were 19 you could just look at your bank balance, but as you grow older and your finances get more complicated, it doesn't paint the entire picture. If you really want to keep on top of your progress, here are some of the most relevant metrics. Net Worth Add up the value of all your significant assets (real estate, cars, cash, stocks, bonds, TFSA, RRSP,) and subtract all your outstanding debts (mortgages, credit cards, LOC, car loans, etc.) and whatever is left over is your net worth. It can be negative or positive, it will definitely fluctuate (how much more is your house worth this year than last?), but it will always be the gold standard for measuring your financial standing. If you are serious about getting an overall measurement of how you’re budgeting, saving, investing and other financial initiatives are working, you should be calculating your net worth on a regular basis. Monthly Spend You need to know where your money goes every month before you can focus on how to start saving money. Some expenses are regular (loan/mortgage payments, some utilities, RRSP or TFSA contributions), and can be easily monitored almost to the penny, while others fluctuate depending on the season or your social calendar (food, clothing, entertainment, travel). The key is to track all your expenses for several months and land on a monthly average spend you can use as a benchmark going forward. You can always dive into your expense tracking details to find specific areas to cut back but keep your focus on the bigger picture of average monthly spend. High-interest Debt Reduction Some debt is inevitable and while you may be tempted to attack a low-interest mortgage, it isn’t mission critical if you are disciplined and saving and investing that extra cash. On the other hand, any higher-cost debts (over 5%) like credit cards, LOCs, vehicle loans, student loans, etc. need to be dealt with ASAP. Fortunately, of all the ways to measure your financial progress, none is more satisfying or inspirational than tracking the month-to-month demise of a long-standing, interest-sucking debt like a credit card balance. Beyond the stress relief and emotional boost, it also makes a huge impact from a financial perspective. That money previously wasted on interest is now going to steadily flow back into your pocket and can be used to attack another hi-interest loan – or to save and invest!

2. Credit Score While you may not agree that your credit score is an accurate picture of your money management ability or financial situation, it is an objective, frequently used 3rd party yardstick that is based on real world data. It is also quite responsive to change, although it may take a few months to catch up due to the lag in collecting data. If you are responsible (or irresponsible!) with your use of credit, you will very likely see a corresponding change in your score. Also keep in mind that your credit score is key to capitalizing on many opportunities, not just lower interest rates on loans. You should check your score a couple of times each year. Advisor Fees Many people are blissfully unaware of how much the fees (like a 2% MER on the mutual funds in a TFSA or RRSP) on their investments are costing them every year, and how these fees are compounding over time to rob thousands from your retirement fund. You should be investigating all the fees (built into funds and any additional fees paid to your advisor or bank) and keeping your total under 1% annually. There are some very low-cost DIY investing options that are well below 1%, but they may require more time and knowledge than you have. Find a solution that works for you, but always keep a close eye on the cost of your investments. Reliably and accurately assessing your progress is a must if you are serious about improving your financial situation and want to sustain that improvement over the long-term. Make sure you have some benchmarks and metrics in place to help you focus on goals and keep you motivated.