4 Metrics You’re Growing Your Wealth (even if you’re just starting out)
In this episode, we discuss the four Key Performance Indicators (KPIs) for wealth-building and how tracking them can set you apart from 99% of others.
We also talk about why ‘allocating’ money is a more effective approach than ‘budgeting’, the power of a one-page financial plan and the practical and emotional benefits of leaving the rental cycle.
Enjoy the episode!
0:00 – Intro
1:11 – Understanding Lifestyle Burn Rate
7:11 – How to Know You Are on Track to Be Wealthy
10:04 – How to Measure Lifestyle Burn Rate?
12:46 – How to Track Your Lifestyle Burn Rate
17:54 – Definition of Net Worth
20:58 – The Importance of Measuring Assets
26:20 – How Should You Track Your Financial Goals
28:48 – How to Get off the Rental Ladder
Every person’s journey to wealth varies, with some attaining it through inheritance while others hustle and grind to build it from the ground up.
One of the most frequently asked questions I encounter, especially from those starting their wealth journey, is, “How do I know I’m on track to be wealthy?”
To answer this, I’ve devised four Key Performance Indicators (KPIs) that I believe can guide you on your wealth-building journey.Read More
The Real Definition of Wealth
But before we start, let’s first define the difference between being rich and being wealthy.
While many use these terms interchangeably, there’s a significant distinction.
Being rich relates to earning a lot of money.
Wealth, on the other hand, is about accumulating assets you can depend on when your regular income stream stops.
Think of it this way: you could earn a six-figure salary and be deemed ‘rich,’ but if you have little to no assets to fall back on, you’re not truly wealthy.
Key Performance Indicators (KPIs) for Wealth Building
- Lifestyle Burn Rate
The lifestyle burn rate determines how much your income goes towards your living expenses.
For instance, if you earn $100,000 post-tax and spend $60,000, your lifestyle burn rate is 60%. This metric is invaluable because it reflects your spending habits.
As many people increase their earnings, they often elevate their spending without a second thought. This mindset can hinder one’s ability to transform their income into appreciating assets.
Wealthy individuals often maintain or even reduce their lifestyle burn rate as their earnings grow. This discipline creates a surplus, allowing more funds to be invested in wealth-building assets.
- Consistent, Predictable Savings Patterns
When I begin consultations with clients, I usually probe into their savings habits.
More often than not, there’s a disparity between what they believe they’re saving and the actual figure. This misalignment isn’t a sign of dishonesty but more an indicator of our human blind spots.
The hard numbers, gleaned from a close examination of bank statements and expenditures, don’t lie.
A consistent savings pattern is the hallmark of a potential wealth builder. It’s not about occasional lump sums added to your savings, like bonuses or tax refunds.
True wealth is built upon the foundation of regular, predictable savings, allowing you to plan and invest with precision.
Peter Drucker’s renowned quote, “What gets measured, gets managed,” aptly sums up the importance of these two KPIs.
Only when we are clear about our financial habits can we begin to take control and steer our ship towards the shores of wealth.
- Net Worth
At its core, “net worth” is an accountant’s term. It gives us a snapshot of our financial health.
If you were to liquidate all your assets today – selling everything you own – how much cash would be left in your hand?
To determine this, you need to tally up the total value of all your assets, everything that could be converted to cash.
Then, subtract any debts or outstanding obligations. The remaining figure is your net worth.
Most people generally understand that net worth is a measure of wealth. But many individuals, particularly those just starting out, don’t frequently measure it.
Often, they wait until they feel they have something substantial to measure. However, even if the current net worth figure seems small, it’s you still have to monitor its progress over time.
It’s because, just like compound interest, net worth growth can be exponential given the right conditions and investments.
- Working Capital
Working capital isn’t just about the money you have in the bank. It’s about understanding how much of your wealth is actively working for you.
For many Australians, their family home is their most significant asset.
But if most of your net worth is tied up in your home, how much of that capital genuinely works for you?
If it’s merely sitting there, not being used as a growth asset, I cheekily refer to it as a “big fat lazy panda”.
The goal is to ensure your assets, minus any loans, are growing in value and purposefully being invested.
The Interplay of Metrics
How these four metrics play together is like having a dashboard where you continually check and assess.
Merely measuring and monitoring these aspects can set you on the right path.
It’s about constant feedback – if you realise your lifestyle burn rate is too high, you can adjust accordingly.
While I’ve developed tools for clients to track these metrics, it doesn’t have to be high-tech. Sometimes, a simple journal or a scrap of paper will do.
What’s pivotal is the act of regularly checking where you stand and setting future goals.
The key here is control. We can’t predict or control the economy, environmental shifts, or even unforeseen life events.
But, owning a piece of real estate can grant you some semblance of control over your financial destiny.
It eliminates the unpredictability of the rental ladder. You’re not subject to the whims of the rental market or a landlord’s decision.
It’s about possessing that ace up your sleeve, giving you security and peace of mind.
The Blueprint to Investing
The word ‘plan’ might intimidate many. But at its core, it’s just a roadmap of where you want to go and how you plan to get there.
Whether investing in your first piece of real estate or setting up a savings strategy, every plan boils down to the action steps you’re committed to taking.
A plan brings accountability.
It serves as a touchstone to ensure you progress towards your specific outcomes.
And, as I always emphasise, simplicity is key. If you can’t boil down your plan to a single page, you’re likely overcomplicating it.
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