You Won't Know Unless You Measure

I have a new practice of inviting at a minimum, two influential people to lunch every month. Yesterday I took a guy to lunch that is an ex-accountant. 30 years ago he left one of the big eight firms (at the time) to be a partner and acting CFO and COO of a Cummins distributorship. 3 years ago, after years of diligent effort, he and his partner sold the business. It was rumored to have sold for well over 100 million. Not bad, eh?

Over lunch, I asked him, "What was the factor that most contributed to your success?" He shared a philosophy that they lived by:

        You don’t know what you don’t know

        You can’t do what you don’t know

        You won’t know unless you measure

        If you value it, measure it

        If you don’t value it, don’t measure it and don’t do it

They used this philosophy to dramatically increase profit margins in every department of the company.

That is an extremely pertinent and powerful philosophy if applied to personal finance as well as business. A vast majority of people have no clue what their numbers are. I’ll prove it.

-           How much money did you spend on gas last month vs. what your projections were?

-           How much money did you spend on entertainment last month?

-           What percentage of your income did you invest or save last month? how much was that? (if the number is 0%, don’t get thinking you are too smart for knowing your numbers=)

-           What is your net worth? what is the year over year increase or decrease?

-           How much money will it take for you to retire at your desired retirement age to maintain the lifestyle you currently have?

How to apply the philosophy to personal finance:

1.  Budget – track your expenses (all of them), eliminate unnecessary “wants”, make sure your “needs” are less than what you earn,  go to a cash system and when the money is out, stop spending (McDonald’s per transaction sale went up 47% when they began accepting credit cards)

2.  Net worth – what is the value of all of your assets minus all of your liabilities. The difference is your net worth. This is an important number as it will be an indicator of your capacity to stop working someday

3.  Capital at Work – how much money is working on your behalf each day? This is determined by summing up the value of your stocks, bonds, and investment accounts.

Stay tuned for a more detailed explanation of each – how to track, utilize and improve them for the sake of improving your financial situation and ultimately reaching your financial objectives.