Why you need to know these 6 key financial numbers
Your road to financial freedom is a journey of a thousand steps. Fortunately, the path is well-trodden by millions of investors who have already reached financial independence.
Drawing upon their experience, I can help you to extract the key learnings and metrics you’ll need as you continue your financial journey. This journey is a marathon, not a sprint. It will require patience, discipline, optimism, and regular reflection on the progress you’ve already achieved.
It is this practice of measuring your progress that I want to reflect on in this article so that you can avoid the fate of too many unsuccessful investors: discovering an unpleasant truth when it’s too late to correct your course.
So, here’s how to avoid common mistakes as you strive to achieve financial freedom, plus how to understand your six key financial numbers and why they matter.
A lack of financial awareness can set you on the road to failure
While successful investors have many common traits that you can learn from, so do those who were unsuccessful in their quest.
Common mistakes of those who fail to achieve financial freedom are insufficient pension contributions, unwise investment portfolio decisions, acting on emotion, and inadequate protection.
However, perhaps the trait that leads to all the above mistakes is the failure to take regular stock of your reality, preventing you from making changes that could rescue your situation.
Like flying, financial planning is not a perfect science. The assumptions I make about the future may well be incorrect, but they’re useful all the same. This requires you to be flexible, adaptive, and aware of your progress.
In much the same way as flying, a successful investing journey requires constant course corrections to arrive at the correct destination.
Understanding your 6 key financial numbers
To make the right changes, you need to track several important numbers. As the management expert Peter Drucker once said: “What gets measured, gets managed.”
Below are the six important numbers I recommend you keep track of, and that can help you reach financial freedom.
1. Your wealth creation window
Quite simply, this is the number of months until you hit your “financial independence day”, or in other words, when working becomes optional for you.
In my experience, knowing this number in months rather than years makes it feel more motivating for most people.
For example, if you’re 52 and want to retire at 62, you have 120 months left in your wealth creation window.
2. Your saving percentage
This is the percentage of your take-home pay you are saving and investing for the future.
The more you can put away, the faster you are likely to be able to retire. Additionally, by putting away more, you learn to live on less.
Successful investors will routinely put away more than 20% of their income.
3. The percentage of your investments that are in global equities
Using history as our guide, equity investment – owning shares in the great companies of the world – will provide you with the best long-term returns.
Subject to your circumstances and future plans, there is a strong argument for moving as close to a 100% allocation to equities as possible.
4. Your retirement income needs
This figure will be the monthly income you will require to live comfortably in retirement. Clearly it will depend on your lifestyle, the number of financial dependents you have, and your future aspirations.
5. Your retirement income shortfall
Simply, this is the difference between what you will need and what your current expected retirement income is.
You’ll likely be planning to draw from several sources in retirement, such as from your State Pension, investment portfolio, private pensions, or rental income.
This is the amount of income that your investment portfolio will need to provide. I can help you assess how big your portfolio will need to be
6. The percentage of your income that is protected
This is what critical illness, income protection, and life insurance is for. We all think we’re invincible, but this is a serious topic. Too many people insure their phones but not their income.
When you know your numbers, you can then review and calibrate your plans
From experience, we know that the more you understand about your finances, the faster you can progress towards financial freedom. We encourage you to develop a system for keeping track of your progress across the areas outlined above.
Above all, knowing the truth about your situation gives you greater agency over the course of your future. Some people let life happen to them, and some shape their future to their desires. We encourage you to aspire to the latter.
Get in touch
If you’d like to talk about your own financial circumstances and your important numbers, then please get in touch.
You can call me on 07769 156 250.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Equity investments do not afford the same capital security as deposit accounts.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
Pension savings are at risk of being eroded by inflation.
The Financial Conduct Authority does not regulate will writing, tax planning, estate planning, and trust advice.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
