Taking control of your personal finances is a process that requires regular tracking of your progress and measuring interim results. It is important for entrepreneurs to understand their company’s financial performance. This data concisely and clearly shows how well and quickly your business is progressing, and highlights important warnings if something is wrong. The same is true in personal finances, says Kateryna Butko, Advisor Manager and Financial Advisor at Smart Family Office. in an article for Minfin.
Why is this important?
Measurement and analysis allow you to track your performance, compare with previous periods to identify improvements, your norm, and your own weaknesses. In addition, it allows you to plan qualitatively, maintain financial health, and achieve your goals.
Let's start with something simple.
In terms of income, it is important to understand its structure and dynamics. A snapshot like “I earn 40,000 hryvnias” will tell you little about a person’s real financial situation. You need to track trends over time. The same goes for expenses.
An interesting indicator for analyzing expenses is the personal inflation rate, which shows how fast your expenses are growing from year to year. To calculate it, divide your current annual expenses by your expenses for the previous period and subtract 1. As a rule, it is not good if your expenses are growing significantly faster than inflation in your country of residence from year to year. And a trend where expenses are growing faster than income is dangerous.
For example, if in 2022 you received income of 408 thousand UAH, and spent - 300 thousand UAH; in 2023 you earned 480 thousand UAH, and spent 336 thousand UAH, then your personal inflation rate is 12%, the inflation rate in Ukraine in 2023 was 5.1%; but your income increased by almost 18%. Despite the fact that the personal inflation rate is higher than the country's indicator; you increase your earnings faster than your expenses.
This indicator is another way to monitor your cash flow. You need to be flexible with this metric - because in one of the years you may have an expensive purchase - for example, replacing a car or arranging a wedding.
Savings rate — one of the most important indicators in personal finance. It shows what proportion of your income you turn into assets, rather than spending. The formula is simple: (Income - Expenses) / Income. For example, if you earn 40,000 UAH and spend 28,000 UAH, your savings rate is 30%. This indicator should be positive. Basic recommendations often state the need to save from 10% of income. I suggest a more personalized approach. Analyze whether this level of savings is enough to achieve your financial goals. If not, determine the target level and track the dynamics of changes. If you want to increase this indicator, you can do two things: increase your income and reduce your expenses.
Do you have any? reserve fund, do you track its level? A cushion is the basis of a person's financial security. Its level should be three to six months of your expenses. The optimal level of the reserve fund for our example is 84 - 168 thousand UAH. Reviewing this indicator proves that you are ready for unexpected circumstances - emergencies, or opportunities.
Net worth — the most important indicator of personal finance, which determines the level of your wealth. Importantly, this metric can help determine how close you are to financial independence. Calculating your level of wealth is not difficult. You need to sum up the value of all your assets: bank and brokerage accounts, real estate, etc. And then subtract your liabilities: credit card debts, mortgages… A good level of net worth will vary from country to country, depending on a person’s age and standard of living. Therefore, it is best to compare this indicator with your own previous periods and draw a parallel to your financial independence. In terms of assets, it is worth monitoring compliance with your investment strategy, indicators of profitability, risk and liquidity.
A few practical tips:
- Set goalsBy identifying them, specifying an amount and a deadline, you will be better able to maintain discipline and track progress.
- Use services that simplify accounting and analysisFor example, for income/expenses - Saldo; for wealth tracking - FIREkit, where you can also assess the profitability, riskiness, and liquidity of assets.
- Be flexibleIf you have not achieved your goals in a certain period, remember that the best way to change is to pay attention to the reasons and form a plan for improvement.
- Use the services of a financial advisorIt will help you set goals, identify key metrics, and focus your efforts on achieving them.
Whether you’re building a savings account, planning to buy a car, or moving toward financial independence, financial literacy can help you make decisions that align with your goals. Build strong financial habits, identify your values, stick to them, and track your progress step by step.