Thursday, March 28, 2013

What Gets Measured Gets Done ... Saving, Borrowing and Investing

That which we measure is that which usually gets done. That's because by going to the effort to measure how well we're doing something, we thereby demonstrate its ongoing importance to us.

And if we bother to measure it, we also have an excellent chance of improving the performance and related outcomes of that which we take the time to measure on a regular basis.

And then if we throw in a 'reward' factor to incentivize ourselves to improve upon whatever it is that we're measuring, we really have a virtuous feedback loop improvement factor working for us.

And that's exactly what we need to do to establish and develop the habit of continuous and rapid improvement on the things that matter to us --- such as saving and investing properly and responsibily over the long term. So let's review the basics of saving, borrowing and investing in relation to measuring our performance. To me it's first and foremost a 'net savings' issue.

Since we can't measure everything involving saving and investing, what should we choose? What's most important to our future success?

How much we're spending or saving, or by how much the value of the assets are growing over time? Or perhaps how much debt we're incurring?

My own preference would be a combination of 'total savings less total debt,' or 'total debt less total savings,' as the case may be.

In other words, if we owe zero and save $1, we have plus $1. But if we borrow $100 and save $1, we have minus $99.

Keeping a cumulative running score in that way will always give us a good view of where we stand financially.

Keeping score may also help us to refrain from borrowing excessively to attend college or to purchase a new home. And it may help persuade us to quickly begin a lifetime habit of periodic and increasing savings.

Tracking Your Finances, One Number at a Time says this about the importance of focus when measuring performance: 
I think it’s true that if I want to improve my performance in something, I need to measure and track it. As Thomas Monson, an author and president of the Church of Jesus Christ of Latter-day Saints, said: has said: “When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates.”. . .

For some people, the simple act of stepping on a scale first thing in the morning and recording what it says helps manage weight.

This seems like a simple thing. In fact, when it comes to improving our financial situation, it feels as if it’s too simple. So we don’t do it. I wonder if something super simple, like tracking a single number, consistently and for a long time, may be the subtle nudge we need to improve our finances.

Most of the people I talk to, regardless of income or net worth, have no budget or financial plan. So it’s pretty clear that anything that we can do consistently will be better than the nothing we’re currently doing.

So the question I have is: How simple can we make this process and still see improvement?

What if we just tracked one number consistently, over a long period of time?

Which number would be both easy and beneficial?

The default answer is usually spending, but the idea of tracking spending makes people think of budgeting, and budgeting has a marketing problem — very few people like to do it. . . .

But maybe what you spend each day is the wrong number to focus on.

What about tracking a different number like the value of your savings, investments and retirement account? Once a week, you add up the balances and write down that number. Measure it over time. Just one piece of paper with a simple line graph.

Would that lead to change?

I like this idea because it’s what many of us are focused on: having enough money saved to meet some future goal like sending your children to college or retirement. It seems to me that by just focusing on that one number, a lot of the noise goes away.

Another idea would be even simpler. Track the amount you are able to able to save each week or month. That’s a number that gets rid of the short-term variation that comes from the market and focuses clearly on something that we have control over — how much we save. In theory, if you focus on that one number, you will find ways to improve it. That could mean you will find ways to spend less, earn more, or both. Because you want to see that number go up."

Summing Up

What's important is that we establish the habit of monitoring our performance, and then make a habit of trying to improve upon that performance.

For that reason, I like the savings number. Without savings, nothing else happens.

And with savings, putting those savings to work over time in an S&P 500 index fund requires no further effort. From time to time we can check on the change in the index for a given period, then apply that percentage change to the beginning of the period amount saved, and we'll know where we stand. But the key to success over the long haul is sthe amount we're able to save.

The market will do the rest of the work for us.

Then if we increase the amount saved on a regular basis, the cumulative growth in our 'savings' account will prepare us for financial comfort in our oldster years. It's really that simple.

But watch the debt, too.

At least that's my recommendation.

Thanks. Bob.

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