Businesses Use KPI's To Measure Financial Success. So Should You.

The Oxford Dictionary defines a Key Performance Indicator (KPI) as, "a quantifiable measure used to evaluate the success of an organization in meeting objectives for performance". Every business uses KPI's as a way to measure their present state of performance, to identify areas that need improvement, and to establish realistic performance targets. In short, KPI's help them to evaluate their success in achieving their objectives. This can involve the short-term achievement of strategic goals, or long-term progress toward increased profitability. The fact that all businesses use KPI's, in one form or another, is telling. They are concerned about their success and realize that measuring it will help them to improve and stay on track. This provides a clear path to achieving their goals. The revelation here is that the exact same principles apply to personal finance. Every household has short and long-term financial goals, is concerned about being financially successful, and wants to make sure that their retirement savings will last as long as needed. They want to achieve financial security. Why then, do so many households ignore the process of establishing and monitoring KPI's?

According to a 2019 Fidelity study and a 2020 TransAmerica Retirement Survey, 82% of households do not have a written, comprehensive financial plan. Yet, a personal financial plan equates to a business using KPI's. A business might typically measure it's sales, operating costs, gross profit, inventory levels, and markdowns. For individuals, this would equate to gross income, expenses, discretionary income, savings and debt. Having a detailed financial plan helps you to establish realistic goals, understand the direct impact that current decisions have on long-term results, and to track your progress. It will show, year by year, how quickly you are able to pay off debt, how much is really needed to save for retirement, how long it will take to reach your goals, and what you can do to influence the outcome. For retirement in particular, it will help to determine the best age to claim Social Security, how much may be needed to withdraw from retirement funds annually, and how long your savings may last. It also allows you to quickly and easily model "what-if" scenarios so that you can clearly see that if you do "X", "Y" will be the result. Seeing your financial future in black and white is eye-opening, and it will give you the confidence to make the best possible financial decisions for your future.

While you may not think of yourself as operating like a business, there is a distinct advantage to accurately measuring your financial state of health just as businesses do. Simply put, to get where you want to go you need to have a reliable path to follow. If you want to travel to Paris and the only guidance you have is a generic suggestion to head East, you may or may not get there but your chances of success aren't great. If you follow a map you will know exactly how to get there and how long the journey it will take. When it comes to your finances, guessing, hoping, and relying on generic benchmarks and rules of thumb is even worse than just heading East to get to Paris. If you get lost while traveling you can ask for directions, but if you run out of money in your 70's or 80's there may be no recovering. Keep in mind that your finances are as unique as you are and they deserve individualized attention. Don't be afraid to create a financial plan, accurately measure your financial performance, and solve the financial planning puzzle. It feels good to take control of your finances, know what you are doing, and know that that you are headed in the right direction.

Older Post Newer Post