Is it possible to manage your finances based upon a single metric? Maybe rate of return, or savings, or debt/equity ratio or net worth? If not, then what?
Record, Review and Revise, the 3 R’s of financial planning, are fundamental to success. Record is a boring and sometimes difficult task. To make it work, most people shrink the number of variables they track.
A friend used to pop in the bank and have someone hold up his current account card. No red, then all good. A problem arose when the bank went to all black with minus signs for overdraft.
Almost every single-metric measurement system is easy. No single-metric measurement system considers all the important things. All single-metric measurement systems fail. Eventually.
Suppose we pick net worth as a metric. Achieving a high value may cost health, relationships, and may incur more risk than is necessary. Beyond a point, money is just a way to keep score. Some people like the game and forget why they are doing it.
How about rate of return? It could be useful if savings level, inflation, tax assumptions and the state of the world are accurately described in the assumptions. And the world complies.
How about happiness? Pretty hard to measure and it is too much present focused to be useful for a long plan. It is hard to measure or predict happiness for the family in 2038.
The outcome is that we need several, probably many, ways to assess progress. That is hard.
Even if we find a collection of objective measurements to apply to our life, we could still fail. An objective measurement and a well defined purpose do not necessarily generate useful results. The assessment of good enough fit is subjective. Someone has to decide on action and change.
It is sometimes better to think of successful outcomes as being in a corridor instead of being simple line. If we are between the edges of “that doesn’t work” and “that is better than I need” why get concerned?
In most financial plans precision is a trap. Work at finding your corridor.
A guide can help.
Subscribe to the daily MoneyFYI article at moneyfyi.wordpress.com, Follow on Twitter @DonShaughnessy or Contact: firstname.lastname@example.org
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.