How do you measure financial success?
More and more people are looking for a sense if they are “passing” their personal finances or “failing.” We see it all the time with prospects in our office. They assume that there is a simple “Yes, you passed,” or “No, you failed” stamp on their finances and their goals.
While this black-and-white system may work in other situations, it doesn’t work for your personal finances — or other important parts of your life. For example, you don’t “pass” or “fail” as a parent. You may fall short at certain points in your parenting, but that doesn’t mean you are a bad parent or you have failed.
In the same way you shouldn’t measure your success as a parent based on one poor reaction, your financial success shouldn’t based on whether you “passed” a certain amount in your savings or “failed” to reach a financial milestone. There are better ways to measure success in personal finance.
Personal Finance is “Personal”
First, remember that much of personal finance is just that—personal. What success means to you may be very different from the next person, where one person needs x, another would need y. That’s why using a rigid system like pass/fail or generalized advice from a popular financial guru may not work in your favor.
Basic financial theory outlines the four levels of financial success: security, independence, freedom, and significance. While we at Guiding Wealth agree that these four levels can work as broad goals, the system for attaining them is too strict. It doesn’t take your personal needs into account.
For example, many of our clients believe they have to have $1,000,000 saved by retirement, or a certain amount of money saved by a certain age. That’s not true of everyone, and it all goes back to what their original assumptions (often misguided) are about their personal finances. They take the broad advice someone gives and then use that as a measuring stick for themselves.
But what if you just can’t see yourself reaching for those goals? And maybe “security” to you simply means maintaining an emergency fund without having to worry about it. “Independence” means being able to stay home with your children while your spouse works their dream job.
Choose Your Own Definition of Success
Personal finance is personal. There are no formulas or singular right ways to manage your money. You can define and choose your own definition of financial success. While some financial guidelines can help you start managing your money, they shouldn’t have the final say.
How can you measure your progress toward your financial goals?
Setting personal goals and reflecting on why you’re setting them is a good first step. Perhaps you want to save a specific amount of money before you retire. Why did you choose that number? Is it based on a formula you found in an article or book? Did you and your partner decide on it after looking at your finances? Did a financial advisor help you reach that number?
Money is a very easy measuring stick to use. But a number doesn’t factor in your values, needs, personal obligations, or lifestyle. That’s why you should take the time to create and define your unique vision of financial success. Not only will it make your financial goals more meaningful, but it can be a better source of motivation to pursue those goals.
Qualitative Factors Matter, Too
Financial success goes beyond the numbers as well. Yes, you may want to boost your credit score into the 700s, hit a certain amount in your 401(k) contributions, or maintain a net worth that you can be proud of. But when defining your vision of financial success, don’t forget to factor in details that aren’t so easy to quantify.
Look at the non-numerical side of things. Like how many vacations you’re able to take with your family. How much more time you’re able to spend with an aging parent when you invested in better care for them. Or how much happier you are running your own small business instead of making more money for an employer.
These qualitative factors may even have “negative’” financial implications. But they are important to you. Even if they cost more money in the long run or detract from other important areas in your finances, they’re still worthy because they’re included in your dream of financial success.
A Financial Professional Can Help
One thing we can all take away from 2020 and into the rest of our lives is to prioritize what’s important to us. That starts with you deciding what is important for you, not based on what someone else tells you is right for you.
We encourage you to reflect on and define your own idea of financial success. However, it can help to have a financial professional by your side. A financial advisor can work with you to build a strategy to meet your goals and help you take action toward success. If you’d like a simplified approach to financial planning, one that focuses on your wins, contact us at Guiding Wealth.