Your financial well being is dependent on a number of factors that will determine the success of your household’s finances.
Understanding those factors, and keeping a regular pulse on them is critical to maintaining a healthy financial mindset. This applies whether you’re chasing financial freedom like I am, or simply interested in better managing your money.
There are really only a handful of things to keep track of, and they’re all interrelated. None of them are some sort of shocking secret that only a few rich insiders have discovered.
They’re all pretty basic elements that every reader of personal finance should be familiar with. If you happen to be new to this community, I’m sure you’ll recognize most of them.
Since I’ve often referred to one or more of these factors in prior posts, and will continue to do so in future articles, I figured a refresher to kick off the new year would be a good foundation.
So here are the Five Money Pulses to take during your financial check-up. I’ve used the money bucket analogy throughout to keep things a bit light hearted.
Pulse # 1 | Money In – Earnings
How much a household makes can have a huge impact on its financial health. How fast your money bucket gets filled will be highly dependent on the size of the tube feeding it.
The smaller the size of the tube (your income), the slower it will take to get that bucket filled. If you can increase your household income consistently during your financial journey, you’ll have a much better shot at meeting your goals.
Here are a few helpful articles I’ve written on how income plays a big part in financial success:
- Why you’re not being promoted at work
- The most important skill for financial independence
- You need to make $90,000 to become a Millionaire
If your aim is financial freedom, traditional income should eventually play a much smaller role (if any) in your diagnosis. Once financial freedom is reached, passive income would play a bigger role.
Regardless of the source of income, the goal should be to maximize earning potential wherever possible. Make sure to keep track of your household’s income each year, and set goals to increase it. Even if takes a few side hustles to do so.
Pulse # 2 | Money Out – Expenses
If income is the tube that feeds your money bucket, then expenses are the holes that allow your money to leak out. All feeding tubes have holes in them. Everyone’s gotta eat right ?!
The key is keep those holes as small as possible so all your money doesn’t leak out in a given year.
Most people don’t even know how many holes they have in their tube because they don’t bother to keep track of their expenses. That’s fine if you’re well on your way to financial independence, but it just won’t cut it if you’re early in your journey.
If your income is not very high, controlling your expenses is an easy way to overcome that disadvantage. This of course assumes that your income is high enough to meet basic living standards.
Here are a few expense related articles that may be helpful:
- Get rid of even the smallest holes, like your cable bill
- Choose your lifestyle expense package carefully
- Scrutinize your expenses and measure them over time
Your goal should be to establish a baseline level of expenses for your household, then find ways every year to trim wherever possible. Once you establish that baseline and mercilessly drive it down, it will be difficult to ignore it when it tries to creep back up.
Pulse # 3 | Money Kept – Savings
If you’ve managed to keep your expenses below your income level, some money should have dripped into your bucket at the end of the year. What’s left over (if any) is what you have to show for your hard work during the year.
The efficiency of your tube is what will determine how filled up that bucket is. It’s taken me over 15 years, but I now have a tube that’s >75% efficient. This means that my bucket will end up at least 75% filled at the end of each year.
The best way to achieve a high savings rate (tube efficiency) is to limit the impact of lifestyle inflation. That’s another way of saying your income should outpace your expenses.
A high savings rate also allows you to eliminate debt at a faster pace. Traditional debt can be a significant headwind to financial independence.
Here are some posts focused on savings for additional reading:
- The more you save, the better chance at financial independence
- Lifestyle inflation is real, and its impact is substantial
- Still have student loans, it could be a bigger curse than you think
The goal is to measure and maximize the savings rate over a number of years. The more buckets filled each year, the more freedom years lay ahead. Everyone should aim to save at least one year’s worth of expenses each year on average. At that pace, you effectively cut your indentured servitude in half.
Pulse # 4 | Money Grown – Investments
At some point in the journey a diligent household will begin to have extra money buckets laying around. That money can be invested to help fill even more buckets by creating new feeding tube sources.
Investing your money has a compounding effect which can add up dramatically after a number of years.
There are endless ways to invest your money and help it grow, however all investing comes with a certain level of risk. Generally, the more aggressive your investing strategy, the riskier your exposure is.
Investments are necessary to avoid getting killed by inflation over time. The key is to find a good balance between returns and risks.
Here are some of my thoughts on investing as reference:
- Watch out for how aggressive your investment projections are
- Alternative investments in moderation can help boost returns
- Without investing, it would be difficult to retire before 70
The goal is to build a sound investment strategy which will overcome any potential financial headwinds. The more buckets you have automatically getting filled, the better prepared you will be for financial independence.
Pulse # 5 | Money Impact – Net Worth
Eventually, all those money buckets will add up to your net worth, which is basically one big money cistern. Your net worth is made up of all your assets, less any liabilities such as debt.
The size of your net worth contrasted with the size of your lifestyle expenses will largely dictate the impact money will have on your life, and the number of options you will have.
Where all those money buckets are sitting will also have a significant impact. You’ll need to pay attention to which bucket you fill up based on your own personal aspirations. I’ve split my net worth into 3 big buckets: House, Traditional Retirement, and FIRE Fund. With the latter being the most critical for me personally.
I’ve written a number of articles on Net Worth to demonstrate its implications:
- Why I share net worth numbers with my readers
- The quality of your net worth is just as important as its size
- The details behind my own net worth journey
- Envisioning what a future net worth might look like
The goal is to grow net worth over time so it can power your personal goals. It’s also important to measure net worth to determine how much is enough. There’s no point in having more money buckets, just for their own sake. A net worth figure coupled with the other pulses helps to put your entire financial health in perspective.
Hopefully it’s clear that a household needs to keep a strong pulse on all these financial indicators. Your overall financial health depends on it. Each of these indicators plays its own specific role. However they are all interrelated and need to be evaluated as one.
It’s also important to recognize that households reading this will all be at various stages of financial maturity. Some will need to pay particular attention to some pulses over others.
Income is a good example. If your income is such that you’re barely scrapping by paying off basic expenses and debt, you can neglect the other pulses in the short term. All your energy should instead be focused on increasing your income to the point where the other pulses eventually come into play.
Setting financial goals tied to each of these pulses is a great habit to maintain, and an almost certain path to a financially healthy household.
Time for the Max Your Freedom household to start setting some financial goals for the new year!
Readers, do you keep a strong pulse on all these financial indicators? Do you think it’s important to measure financial health each year? Do you set targets around each of these, or do you focus on a select few? Share your thoughts and comments below! – Max
You can call me Max…I’m a Gen-X executive planning to retire from the corporate grind by the age of 45. Although I’m already financially independent, I haven’t yet reached true financial freedom. Join me on my journey as we discuss everything from personal finance to travel and beyond.