Most every organization uses metrics to determine success. Also referred to as key performance indicators (KPIs), these numeric measurements can be used to assess financial success and progress toward goals. When selecting personal financial KPIs, be sure to: (1) identify what’s important to you for your financial goals; (2) create a system to track your progress, in writing, with a computer file, or an app; (3) involve all household members in the decision process.
Some common KPIs you might consider monitoring include:
- Credit score, which is affected by missed debt payments and involves your ability to access loans in the future.
- Savings rate is vital for future major purchases and planning for retirement. Financial advisors recommend saving 10-15 percent of your income.
- Discretionary spending measures a person’s level of expenses related to meals out, fancy clothes, vacations, and other non-necessities, so money can be saved for more important goals.
- Net worth (total assets minus total liabilities) measures financial health progress, which can increase by paying off debts and increasing saving and investing.
More creative KPIs are available for advanced personal financial planning. The Financial Health Index combines several financial metrics to provide a measure of overall financial health. The Financial Independence Number indicates the amount of money needed to live off the investment returns of your net worth. Living Within Means Index measures if necessary expenses are covered by a person’s income.
For additional information on KPIs for personal finance, go to:
- Have students create a visual design that might be used to monitor progress for one or more personal finance key performance indicators.
- Have students talk to others about actions they take to monitor their financial progress.
- Refer students to the Road Map/Dashboard feature at the end of each chapter of Personal Finance or Focus on Personal Finance to view additional examples of key performance indicators.
- What are the benefits and limitations of personal finance KPIs?
- What are other KPIs that might be valuable indicators of personal finance success?
A lifetime of skillful financial decisions starts with experiential learning at a young age. To increase financial literacy for the next generation, consider these actions:
- Give children a payday. Instead of a weekly allowance with simply giving money, create a system of earning these funds. Connect their household chores to earned amounts with a weekly payday. This practice can teach a child that people are paid for work to earn money for their living expenses.
- Create awareness of opportunity cost. Every financial decision has trade-offs. Once money is spent, that money is not available for other uses. Keeping money in a clear jar allows the young person to visually see what funds are available, and when the money is gone.
- Allow children to experience borrowing. If a child wants to buy something but does not have the money, set up a signed loan agreement with repayment terms. Also create a plan for the amount owed to be taken from future household earnings. Have the young person physically pay the money to better understand how credit works.
- Connect them in the budgeting process. Include children in the discussion of family finances and the household budget to help them understand where money is spent. Consider creating a chart with spending amounts, or use slips of paper representing money that are used to pay the bills each month.
- Teach wants vs. needs. Shoes or a clothing item may be a need but not a high-fashion version. To cover the cost of the higher-priced item, young people should be required to earn the amount for the additional expense.
- Use money games. These activities can help children understand earning, saving, wise spending and other basics of money management for a financially sound future.
For additional information on financial literacy for children, click here.
- Have students conduct online research to locate other actions used by parents to teach their children smart spending and wise money management.
- Have students talk to parents to obtain suggestions that might be used to teach wise money management to children.
- What are the financial, social, and relational benefits of children learning smart spending and wise money management early in life?
- Describe possible money management learning activities for children that involve creative use of technology.
Many young people making high salaries still say they feel broke. A “Henry,” short for “high earners not rich yet,” is someone who lives an extravagant lifestyle combined with their student loans has very little money left over. These “working rich” place a strong emphasis on travel, and often limit their spending on food and clothing in order to afford luxury trips. While many have a desire to get their finances in order, very few take appropriate actions to do so.
Henrys are characterized by a higher-than-average income, little or no savings, and a feeling of low material wealth. Most of their earnings go toward current living expenses rather than building wealth with investments.
For additional information on high earners not rich yet, click here.
- Have students conduct online research to determine various financial attitudes and behaviors of people in different age categories and life situations.
- Have students prepare a video that recommending actions to the people described in the article.
- What factors might be influencing the financial activities of the people described in the article?
- Describe possible financial concerns associated with these financial attitudes and behaviors, and recommend corrective actions that might be taken.
Kakeibo, pronounced “kah-keh-boh” and translates as “household financial ledger,” is a method used in Japan for managing personal finances. For over 100 years, this system has helped people make smarter money decisions.
Similar to other budgeting systems, kakeibo is designed to help you understand your relationship with money by recording all financial inflows and outflows. As proven by research, this recordkeeping method emphasizes physically writing your financial activities making you more aware of bad money habits. Kakeibo can help you become completely honest about your spending with the use of four categories: (1) needs, (2) wants, (3) culture, such as books and museum visits, and (4) unexpected – medical expenses or car repairs.
Kakeibo encourages you to ask yourself these questions before buying any non-essential items, or things you buy on impulse:
- Can I live without this item?
- Based on my financial situation, can I afford it?
- Will I actually use it? Do I have the space for it?
- How did I come across it in the first place? (Did I see it in a magazine? Did I come across it after wandering into a gift shop out of boredom?)
- What is my emotional state in general today? (Calm? Stressed? Celebratory? Feeling bad?)
- How do I feel about buying it? (Happy? Excited? Indifferent? And how long will this feeling last?)
In addition, to spend more mindfully, Kakeibo recommends that you:
- Leave the item for 24 hours.
- Don’t let major “sales” tempt you.
- Check your bank balance regularly.
- Spend in cash.
- Put reminders in your wallet – use a sticker: “Do you REALLY need this?!”
- Change the environments that cause you to spend.
For additional information on kakeibo, go to:
- Have students conduct a survey to determine reactions to this budgeting system among people in different age categories and life situations.
- Have students prepare a visual summary of some of the characteristics of the budgeting system.
- What elements of this budgeting system might people find beneficial? What are possible drawbacks?
- If you were to implement this system for your life, which actions would you select to do first?
Many personal finance reports are published with advice that may not provide the best guidance. In an effort to avoid buzzwords and troubling phrases, consider these suggestions:
- determine who conducted the research; a company may sponsor a study that lacks the rigor of academic or government researchers.
- be wary of research that reports feelings or predictions rather than actual behaviors and actions of respondents.
- consider the number of people in the study and how the respondents were selected.
- avoid generalizations that about a certain age group, such as Millennials, Baby Boomers, or Generation X.
Don’t revise your money management activities based on some survey or research report. If your current actions are working, then you are on the correct path.
For additional information on avoiding personal finance nonsense, click here.
- Have students conduct online research to locate a recent personal finance study to evaluate the validity of the advice offered in the report.
- Have students create a video presentation reporting both valid and nonsense personal finance advice.
- What problems could occur if a person uses inappropriate financial advice?
- In addition to the suggestions in the article, what actions might a person take to determine the validity of personal finance advice?
When considering a career change, the following financial suggestions are offered:
- have an appropriate amount of savings for unexpected expenses during the transition.
- create a budget to live frugally; cut living costs to be prepared for sudden expenses.
- reassess your investment portfolio to reduce risk exposure and possibly eliminate fees.
- seek advice from a financial advisor.
- determine how a career switch might impact your ability to save.
For additional information on financial advice when changing careers, click here.
- Have students talk to a person who recently changed jobs to obtain information about their experiences.
- Have students create a video presentation with suggested actions when planning to change careers.
- What relationship exists between a person’s career choice and money management activities?
- Describe additional financial planning actions that might be appropriate when considering a career change.
To spend less and save more, consider an “anchoring” system. One example of an anchor is the price of an item to determine if that is an appropriate amount of money to spend for the item.
Anchors prevent shoppers from being overwhelmed by the many choices, prices, and features. You can create your own anchors by:
- setting the maximum price you are willing to spend for an item.
- considering the value of an item in relation to the number of hours you have to work to pay for it.
- comparing the cost in relation to another item. If you buy coffee costing $2.50 a cup and want a sweater costing $50, view the sweater as costing 20 cups of coffee. Your “coffee” anchor will help you determine how valuable the sweater is to you.
When buying a home, you may be encouraged to look at properties outside your price range. Anchoring yourself at a price limit will avoid overspending, make you feel more in control, and encourage wiser financial decisions.
For additional information on financial anchoring, click here.
- Have students talk to several people to obtain information about how they determine the price they are willing to pay for an item.
- Have students create a video presentation that demonstrates various anchoring methods.
- How might anchoring help improve personal financial literacy and money management activities?
- Describe anchors people might used to determine the price they would be willing to pay for an item.
Most people would like to be able to go back and do some things differently related to their personal finances. A study by bankrate.com revealed that 76 percent of those surveyed have at least one financial regret. The largest concern, over half (56 percent), involved not starting to save sooner for retirement, an emergency fund, or their children’s education. Other financial regrets reported in the study include: living above one’s means; taking on too much credit card debt; and the burden of student loans.
A recommended action to address these financial regrets include breaking down large goals into smaller, easier ones can help put individuals on a path to success. A “save-first” mindset instead of “spend-first” is also suggested. In addition, consider opening an online savings account with higher returns, and set up direct deposits for regular saving.
For additional information on financial regrets, click here.
- Have students conduct online research to determine various financial regrets of people in different age categories and life situations.
- Have students conduct an interview with a person about actions that might be taken to avoid financial regrets.
- What factors might create situations that result in a financial regret?
- Describe possible financial regrets and corrective actions a person might take.
Young people should take advantage of time, and start investing now for the long-term. When doing so, they should consider these actions:
- Make use of low-cost mutual funds, exchange-traded funds and index funds to minimize administrative costs, transaction fees and commissions.
- Take advantage of tax-deferred retirement programs, which will allow them to invest pre-tax dollars to lower their current tax bill. Employers may match retirement fund contributions.
- Don’t avoid risk by emphasizing conservative investments. Taking on more aggressive investments creates greater potential for higher, long-term returns.
- Effectively manage risk with fixed index annuities, fixed annuities, and market linked CDs. Dollar-cost averaging allows for obtaining more shares at a lower cost during market downturns.
For additional information on investing by young people, click here.
- Have students talk to others for suggested investment actions to take.
- Have students conduct online research regarding the best investments for their life situation.
- What factors might a person consider when selecting investments for their life situation?
- Describe actions people might take to increase the funds they have available for long-term savings goals.
While a savings account and a checking account provide the foundation for managing finances, several other accounts should be considered. Since all most people don’t put all their financial documents in one drawer, all your money shouldn’t be in one account. The various recommended accounts include:
- Emergency savings for funds when you face financial difficulties that cannot be resolved in others ways. An amount equal to 6 to 12 months of living expenses is often recommended. Consider storing these funds in an “out of sight, out of mind” location, such as with an online bank account.
- Regular savings for short-term needs, such as home repairs, vacation, auto maintenance, or new furniture. Be sure to have a goal and plan for these funds.
- Household checking account for paying current bills. All income is deposited in this account with automatic transfers for regular bills and amounts to various savings accounts. Extra funds in this account can go to the regular savings fund.
- Spouse checking accounts to pay expenses for which each person has responsibility as well as work-related costs.
- Health savings account (HSA) for tax-free payments of medical-related expenses. HSAs are especially of value with high-deductible insurance plans.
- The extra fund involves the “fun money” leftover after all bills are paid, savings is under control, and all accounts have a balance at an appropriate level. This money is the reward for spending wisely.
If all your accounts are at the same financial institution, using the online dashboard will allow you monitor your balances. Or, if you use different banks, websites or apps such as Mint.com can be used to view your overall financial situation.
For additional information on needed bank accounts, click here.
- Have students design a personal plan for the various bank accounts they will use to to monitor their spending and saving.
- Have students talk to others about methods used to monitor spending and to maintain an appropriate level of saving.
- What are the benefits and drawbacks of the system discussed in this article?
- Describe actions to monitor spending and saving using online banking and apps.