The Most Important Financial Vital Signs

11 Most Important Financial Vital Signs of Personal Finance

How is your financial health?   Are you financially ill yet you don’t have any symptoms?  Without regularly checking your financial vital signs,  you could have a lingering problem for years costing you thousands of dollars and not even know about it.

When you visit a doctor for a clinic appointment, one of the first things that happens is a nurse will take your vital signs. Height, weight, blood pressure, heart rate, oxygen saturation, pain, and temperature. The physician uses these vital signs, along with the physical exam and other information to make the diagnosis and guide your treatment.

Your financial vital signs are similar.  They can be used to diagnose and treat trouble with your personal finances.   They include things like your monthly budget,  savings percentage and debt to income ratio.  Your should record these numbers on a regular basis to trend how you are progressing on your goals.


How often do you take your vital signs?

How often you need to take vital signs in medicine depends on the status of the patient. If you are in good health, a set of vitals when you come in for your checkup is enough. If you are on life support in the ICU, we are monitoring your vital signs moment to moment.  Small changes in one direction or the other can alter the course of therapy and demand immediate attention.

The point is, the more critical your situation, the more often you need to be taking your vital signs.

You Should be Monitoring Your Finances the Same Way.

If you have a sound financial foundation, your finances are like the clinic patient.  You only need to check your financial vitals every year or so when you have a clinic appointment or changes in your health.   If you have large amounts of debt with too many days and not enough dollars in the month, it’s important to check your financial vitals each day.

The problem is, many people are on financial life support and are only checking their financial vital signs once a month if at all.   They wonder why each month starts to look worse than the one that preceded it.

If you are on financial life support, you need to be checking your financial vital signs every day.

Chances are you don’t know what your financial vital signs are.   When you look to see how much money is in your account at the end of the month what are the financial vital signs you review?

If you don’t have a set of vital signs that you are following,  it’s hard to see where you are in relation to where you want to be and how far we have come with your goals.


3 Financial Vital Signs to Follow Daily:

#1 How Much Did You Spend Yesterday?

If you are not where you want to be with your financial goals, you need to know how much you spend each day.  There are only two levers to pull in personal finances,  how much you make and how much you spend.  Increasing your earnings is something that everyone should consider, but you can still outspend your earnings no matter how much you make.

Why This Works:  On the surface, this seems like an easy task.  If you never went to the store or took out your wallet, you must have spent nothing.   What you are looking for are the stealth transactions and subscriptions that you forgot you had.    The automatic bill-pay transactions.  The subscriptions to Netflix, Amazon, Pandora, Blue Apron, pest control, pet supplies, etc… These overlooked transactions will destroy your budget at the end of the month.

#2 How Many Financial Transactions Did You Make?

You may be asking yourself,  why does the number of financial transactions each day matter?  I have found it useful when starting a budget to focus on the number of transactions more than the dollars at first.

Why This Works:  Transactions will add up quickly when your life gets busy.  Do you need to run to this store right now or can it wait?  Do we need to stop for a snack for the kids or can we just wait till we get home?

The amount you spend will come down automatically as you decrease your transactions each day.

#3 How many subscriptions do you have?

Companies of all shapes and sizes are transitioning to subscription models.  You no longer buy your music; you subscribe to a service.  You no longer rent your movies, you subscribe to Netflix.  In some cities, you don’t purchase a car but subscribe to a car sharing service.

Why This Works:. Once you have a subscription, that company is depending on inertia to keep you from unsubscribing.  Each subscription is not a large sum; this is how they get you to sign up. The transactions become lost on your credit card statements each month as they begin to add up.

If you can do one thing to keep more money in your pocket,  it is to limit the number of services you subscribe to each month.

 


5 Financial Vital Signs to Follow Monthly

#4 How Much Did You Make This Month?

This seems like it should be easy to track but it can get a little tricky for some people.   Even if you only have your job for income each month,  items like bonuses, refunds, and things you have sold all add to your bottom line.   It can be even more complicated for jobs that have irregular income dependent upon overtime or commission.

Why This Works:  So far you have been tracking how much you have going out each month, but now you need to compare that against what you are bringing in.  For individuals with irregular income, it’s critical to track if your actual income matches your expected income.   It is also helpful to make sure no mistakes have been made on your paychecks.

#5 What is Your Debt to Income Ratio:

Your debt-to-income ratio is the measure lenders use to gauge how well you can manage your debt.  You should treat a high ratio like the plague.  Lenders like to see a debt to income ratio of less than 25%.   If you let it creep higher than 35%-45% you can start to have trouble getting approved for mortgages and loans.

Why This Works:  Debt is essentially a subscription that you cannot cancel.  Credit card and student loan debt are the worst offenders because there is nothing you can return to eliminate the payments.   You should work to reduce your debt payments each month using the “Snowball Method.”

#6 What is Your Savings Percentage:

What percentage of your gross income are you saving each month?   Are you maxing out all of your pre-tax accounts? Your 401k, 457, 403b, etc.. Do you have a high deductible health plan you can use?  Do you have extra $ you can put into a backdoor Roth IRA?

Why This Works:  If you had to pick a single financial vital sign to follow, this is it.  The income you need to live on when you choose to no longer work has to come from somewhere.  It comes from your savings and investments early in life.   The more you save day-to-day, the less you need to save in total.   If you are saving 0% of your income and spending 100% or more, you will never be ready to retire. It’s shockingly simple math!

#7 How Much is in Your Emergency Fund:

Everyone needs an emergency fund.  How much you keep in this fund and where you stash your money is up to your risk preferences.  At a bare minimum, however,  everyone needs to have at least $1,000 that they can access in an emergency.   How do you find money for your emergency fund?  The quick way is to sell some things you don’t need anymore.  If you wouldn’t buy it again,  then sell it!

Why This Works:   When you face an unexpected expense and don’t have savings, this can lead to a cycle of debt and financial insecurity.  There are always unexpected expenses,  that is why they are unexpected.

#8 Your Capital’s Earnings to Earned Income Savings Ratio:

How much have you managed to save? Any online retirement calculator will you an obscene number needed to retire.  It’s enough to make you throw up your hands and quit trying.  A better goal and financial vital sign to follow is your Capital’s Earnings to Earned Income Savings Ratio.

This ratio compares how much of your nest egg growth is coming from your savings each month and how much is coming from your portfolio.

Why This Works: Two words: Compound Growth.  In your early years of saving, your ratio is going to be much less than 1.   The vast majority of the growth in your portfolio is going to come from how much money you save from your earnings each month.   Eventually, you hit the magical tipping point when your ratio is 1.    From here on out, as long as you keep your savings rate the same, compound growth has begun.  Your portfolio is now working harder than you are and that is a thing of beauty.


3 Financial Vital Signs to Follow Yearly

 #9 What is Your credit score:

The last thing you should track periodically is your credit score.   Many banks and some of the major personal finance apps allow you to check your score for free within their app.   If you have a history of paying your bills on time and don’t care large balances of credit card debt your credit score will be okay. If you have missed payments and have large revolving balances on your credit cards, you will need to follow this vital sign more closely.   You will also need to learn how to budget.

Why This Works:  Your credit score remains relevant even if you don’t need to borrow money in the near future.  Other industries like landlords, cell phone companies, and utility companies are using credit scores to check eligibility and the need for security deposits.    It’s also important to monitor periodically for identity theft. 

#10 What is Your Asset Allocation:

There is no free lunch in investing, but diversification is the closest thing to a free lunch as there is.   All diversification means is spreading your money out over multiple different investments instead of putting all your eggs in one basket.

Why This Works:   Spreading out your investment risk decreases your odds of you losing money.   By annually rebalancing your asset allocation you automatically buy low and sell high.

#11 What is Your Portfolio’s Expense Ratio:

Your portfolio’s expense ratio is the second free lunch of investing.  Picking an asset allocation and investing it in a series of low-cost index funds is the easiest way to have a few extra hundred thousand dollars for retirement.

Why This Works:   Every penny you spend on your investments becomes a dime that you have lost over time.  These costs can add up quickly.   A portfolio of funds with an expense ratio of 1.0 managed by your friendly advisor for a 1% fee means you are losing 2% of your money off the top each year.


Summary:

How critically ill are you?   Hopefully, you wrote down some of these numbers to double check.  Perhaps you are following them regularly already.    If not,

Do something today to make it better!

Cancel a credit card. Find something you don’t’ use and wouldn’t buy again to put on eBay? Can you sit down with your spouse and have that discussion of where you all are and where you want to be in 10 years.

Write it all down and put it on a calendar.

How may transactions did you have today?  Find some small wins. Pay off that smallest debt first. Use the snowball method to get some financial momentum.

Don’t get discouraged by a lack of progress at first.  Unless you decide to make drastic changes in your life,  change happens slowly.   These small investments in yourself will slowly add up over time.   You don’t have to get 100% better next month.  Just aim for 5% better.  That 5% improvement will slowly begin to compound, and before you know it, you are on the road to financial freedom.

If you have a goal that you want to accomplish in the next 100 days. I would recommend you check out The Freedom Journal by John Lee Dumas.   His journal is a great accountability partner to help you accomplish your next goal.

What do you think?   Are you tracking your vital signs already?  Is there something that you would include in the list of financial vital signs?

Warnings & Examples

A Wise Man Learns from the Mistakes of Others: Be Wise and Sign Up

Powered by ConvertKit

9 thoughts on “11 Most Important Financial Vital Signs of Personal Finance

  1. chiefmomofficer

    Great post! I know today I had zero financial transactions, but that’s because we were snowed in all day. My favorite days are when we have no automatic payments and don’t spend anything-love seeing the checking account stay steady for a while.

    Reply
    1. Dr in Debt Post author

      I love those days too. They are slowly becoming more common around here! It is harder than it seems at first. Particularly if you have a school aged children.

      Reply
  2. MustardSeedMoney

    Great post Dr. in Debt!!! I meet with people all the time and they don’t understand why they aren’t doing well financially. I then ask them how their budget is and how much they spend a month. I normally get a blank look and they have no idea. I always tell them that they gotta start at the basics 🙂

    Reply
    1. Dr in Debt Post author

      Its almost too easy. My new favorite quote is from Jim Rohn which is “what’s easy to do is easy not to do”.

      There isn’t anything difficult about writing these things down. You don’t even need a spreadsheet, pen and paper works great. But, because it’s just as easy not to do it, most people don’t take the time to do it. In 10 years they will look back and wonder why they are where they are. The people who took the time are not only light years ahead but they have a map of how they got to where they are.

      That is a big part of why I started this blog. A little public accountability of getting out of debt while leaving a map of how I did it for all the professionals a few years behind me.

      Reply
  3. NTP

    Just found your blog and really enjoyed this post, very pratical. #8 has been the toughest to track, any advise on how best to do this would be great. I’m well aware of our net worth and use personal capital and YNAB to track this, but tracking capital earnings is harder. We don’t have any rental properties so really investments are in retirement and taxable accounts but we have 8 retirement accounts between the 2 of us. Thanks again for useful post

    Reply
  4. Dr in Debt Post author

    NTP, Thanks for stopping by. I agree tracking how much your investment accounts are earning is hard. People measure their capital earnings different ways and how to do it is hotly debated online. Some people only want to count the dividends, others count appreciation.

    I don’t split hairs or get bogged down with the details. All our dividends are reinvested so I simply take the monthly account appreciation and subtract out my contributions to the account.

    That gives me a rough idea of how much portfolio growth is due to the work of my portfolio. Then we track it in a spreadsheet. Its not fancy but gets the job done. I do it monthly just because but you could probably get away with doing it yearly. The month to month changes with stock market performance.

    I like the monthly reminder however that we need to continue to grow our portfolio so it does more of the work as time goes on.

    The secret sauce with all of this is patience. In today’s always on society. Big changes in portfolio balances or debt balances take 3 years at a minimum. Once you get the momentum going you are on your way.

    Reply

Leave a Reply