Treating your Money like a business
In business you use KPI’s (Key Performance Indicators) to ensure that you are on track and performing to expectations and that you are providing your customers with what they want in a timely and accurate manner. KPIs are built around the service that your business provides and measure small, discrete elements in such a manner that it is possible to quantify what you are doing right and wrong in any given situation. This could be things like AHT – Average Hold Time and ETR – Estimated Time to Resolve. In either case the emphasis is on the impact to the customer and the measurement is a way of tracking how well you are doing.
In your personal life you can use KPIs also – especially when it comes to your finances. While you do not have to report to customers in a way you still are except this time you are the customer that the KPI is in place to assist and your tracking of that KPI will enable you to see whether or not you are performing to the levels you need to be.
A common mistake with KPI management though is that people often have too many. While it is great that you can track a hundred different things, it’s actually not really worth the effort as resources are always finite and by stretching over too many projects you simply will not get anything done. Here is where something called the Pareto principle comes into play – basically what this states is that 80% of your calls are caused by 20% of your problems. You’ll find this ratio applies fairly consistently throughout the world and it also applies in your personal finances too. So instead of measuring a multitude of different factors and stressing about them all, it makes sense to actually concentrate on the key issues that are impacting you as if you are able to resolve them then you will also resolve the majority of your underlying financial issues too!
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A great KPI for Budgeting is spending limits. If you’ve read some of my other Hubs on Budgeting you’ll understand the concept of Envelope Budgeting but if not the basic idea is that you allocate a certain fixed sum on a monthly budget to each of a variety of different “envelopes” based on your spending needs. This could be for things like Utilities, Rent, Groceries etc... but you’d also have some envelopes for items that are more fluid – Clothing, Entertainment, Dining Out etc... With a spending limit KPI you would be checking whether or not you had exceeded this allocated amount and why and if necessary making adjustments so that you can either “claw back” these funds in subsequent months or changing your allocations.
Another great KPI for personal finance is Debt Tracking. If you have Debt it is essential that you know how much, what interest rate you are paying and when your payments are due. Finally you need to have a plan to eliminate it in as reasonable a timeframe as possible. In this instance I would not make a distinction between so called “good” debt and “bad” debt as if you have a plan to address it and can get rid of it in a reasonable and timely manner any debt is bad debt! The thing that you need to remember is that Debt is one of the key factors that lenders take into consideration when determining your credit worthiness. The higher your ratio of debt/income is the less likely you are to be approved for a new loan at a good rate.
While these two KPIs are not the only ones that you can apply – think about other things that are relevant to you – they are good and useful ones and definitely a good starting point. The next thing you should consider is how do you track it? Well this is something I’ll get into more detail on in my next post!