Monitoring Your Financial Progress and Measuring Results

Monday, December 02 at 09:05 AM
Category: Personal Finance

Taking control of your financial future is a process. As with any process, it is important to monitor your progress and measure results. Doing so will help you to understand how well you are doing and to determine if the financial strategies you are using are working.

A balance sheet provides a business with a snapshot view of its financial status. An income statement measures progress. You should do the same with your personal finances.

Monitoring progress
Preparing a personal balance sheet annually should be part of your financial management. You simply add up all your assets and subtract your liabilities to determine your net worth.

When preparing your personal balance sheet, separate your investment assets into stock, bond and cash categories. Understanding your personal “asset allocation” will help you organize and monitor your finances. You can also find examples in many financial planning books. It also makes sense to track changes from year-to-year to monitor your progress and determine if you are on track to reach your financial objectives.

Measuring your results
The other step, and the one that is more difficult, is determining how well you are doing. Determining your “absolute results” or if your net worth has increased from year-to-year is easy. Determining your “relative results” or how well you are doing compared to the rest of the financial world is not easy. If your stock portfolio went up 15 percent, that is good if the overall market was only up 10 percent. However, if the market was up 23 percent during that same period, a return of 15 percent is not so good.

Measuring your results can be difficult in two ways. First, just doing the calculation can be complex, especially if you added or withdrew money from your portfolio during the year. It is also difficult to know what formula to use.

There are rate-of-return calculation tools in many computer software programs. If you are using a spreadsheet program, then use the internal rate of return function to calculate the total return on your portfolio.

Second, you must have some basis of comparison to measure how well you did relative to a benchmark.  If your portfolio is all stocks, then you may want to compare your returns with those of an index like the S&P 500. If your portfolio is all bonds, then you may want to use the return on long-term government bonds as a comparison.

You can also compare your returns with quoted mutual fund returns. But, remember to compare with a fund that has a similar make-up of its portfolio. If you are a conservative investor with a portfolio of blue chip issues, then don’t compare your returns with an aggressive small company mutual fund.

Next steps
If your results meet your expectations, then keep doing what you are doing. If your results do not measure up, then you may want to take actions to improve them. This could include changing your stock selection process, urging your stockbroker to help you make better decisions, giving the responsibility to a professional investment advisor or choosing a different mutual fund.

Tags: Financial Education
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