Measuring Financial Growth
Quantitative and qualitative methods to measure your relationship with money over time.
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TL;DR
- Your net worth, the total value of your current assets minus liabilities, is a litmus test for your financial well-being over time
- Two measurements to judge the performance of investments include return on investment (ROI), the gain or loss for a particular investment relative to its cost, and the annualized return (AR), what this performance looks like on an annual basis.
- You can measure your subjective relationship with money for free using the Consumer Finance Protection Bureau (CFPB) financial well-being questionnaire, a survey that provides an overall financial well-being “score” between 0 and 100.
Measuring your financial well-being is a necessary albeit subjective exercise. You should consider quantitative factors when determining your relationship with money; however, two people with the same measurements may still harbor vastly different perspectives regarding their financial situation. Therefore, your attitude towards money is just as important in determining your relationship with it. Refer to both quantitative and qualitative factors to evaluate this relationship.
Quantitative Measures
An easy litmus test for determining your current financial well-being is to calculate your net worth. Your net worth is the total value of your existing assets minus liabilities. Assets include cash, investment products, and any other resource you own with a positive cash value. Conversely, a liability is money owed for debt. The SEC created the following table as a guideline to calculate net worth:
Net worth = total assets - total liabilities
Start by inputting the current dollar value for each category. Add any additional assets or liabilities not included in the table. Then, subtract the total value of the liabilities from the total value of the assets to arrive at your net worth.
If this number is positive, then your assets' value is greater than your liabilities. If the number is negative, your liabilities outweigh the present value of your assets. Don’t be discouraged if you are currently experiencing a negative net worth, but do make it a financial goal to make this number positive.
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Owning assets worth more than your liabilities makes it easier to focus on long-term financial goals. Because your net worth will change as you earn money and pay off debt, recalculate this number at least annually to measure progress.
Another way to quantify your relationship with money is to measure the performance of your investments. There are two primary calculations to consider as you invest: return on investment and annual rate of return.
Return on investment (ROI) is the measurement of gain or loss for a particular investment relative to the investment’s cost.
The ROI formula is as follows:
Calculating ROI begins by understanding the total cost of an investment, which includes the price paid to purchase the investment and any additional fees. The total gain consists of both the appreciation of the asset as well as any income earned.
For example, consider an investment purchased for $10, including fees. After three years, the investment appreciated to $15 with no income payments. If you sold the investment at this price for no fees, the ROI would be 0.5 or 50%:
ROI = ($15 - $10) / $10 = 0.5
ROI does not provide full context into returns as the time you hold each investment may vary. To standardize returns, calculate the annualized return (AR). You can compute AR as follows:
In the above example, the investment with a 50% ROI would have an AR of 0.14 or 14%:
AR = (1 + 0.5)^(⅓) - 1
For context, the S&P 500 had an average annualized return of 8.64% between 2002-2022. If your investments are consistently underperforming the annualized returns of the S&P 500, consider rebalancing to invest in a product that more closely reflects market performance.
Remember that your bank, brokerage, or financial planning account may provide reporting and visualizations to help you understand your money. For example, many banks offer tools to visualize your budget, and many online brokerages provide tools to visualize investment returns.
Qualitative measures
