Back when I worked in the corporate salt mines for a living, my managers would often use the phrase “What gets measured, gets done”…. implying that if management didn’t measure employee performance, nothing would ever get accomplished.
That’s probably not far from the truth.
Long before annual performance reviews were “a thing”, business managers noticed that as soon as they rewarded human behavior based on metrics, the human output that produced the metric would immediately get optimized to provide the greatest possible reward.
No big surprises there.
Humans will expend effort and optimize behavior to improve rewards, but the key to creating this behavior is measurement.
You could say measurement is the foundation of our modern world, without too much exaggeration.
So what the hell does this have to do with financial independence? Well, everything…
The Average Joe
Unfortunately, using measurement to improve our chances at reaching FI, doesn’t really get the attention I think it deserves.
Maybe it’s one of those simple truths that often goes without saying… but once we gain the power of measurement, we can start optimizing.
Dollars begin flowing in the right direction. Financial-muscles grow, and efficiency happens almost like magic.
What happens when we don’t measure? Well, take for example your regular Average Joe…
Average Joe goes to work Monday thru Friday. He drives a car, and lives in a house with his family. He puts a percentage of his salary into a 401k, and checks the balance once or twice a year.
At the end of every month Joe gets a paycheck, which he uses to pay the bills, purchase food, and entertain himself.
Unfortunately Average Joe never seems to ever get ahead in life. His bank account never really grows, and his retirement-account balances are trivial.
Some months he has money left-over, and other months things get a little tight. When his bank balance isn’t too small, Average Joe and his wife take a vacation … maybe once or twice a year.
Perhaps Average Joe reads FI blogs (like mine), and wonders in amazement how people manage to save over 50% of our income for a decade. Joe doesn’t think it’s realistic. He lives a life that feels normal, but he never seems to get ahead.
So what’s Average Joe doing wrong?
Well, for one, Joe probably doesn’t read enough … but I’ll tell you his main problem — he’s not measuring a damn thing in his life.
If you read enough FI-blogs, you’ll begin to notice we’re kind of an obsessive lot when it comes to measuring. We measure all kinds of data in our lives — with spending being the key to our high savings-rates.
For example, every month I publish a post that details our monthly spending and dividend income. I uncoil the tentacles and show-off just how much we spend in half a dozen different categories — Outside of our mortgage and childcare costs, we keep our spending below $1300 per month.
Generally though, the Tako family doesn’t set a budget. We never have! But we DO track spending very closely against our income. (It’s what you keep, not what you make!)
As far as our portfolio goes, I’m just as fanatical about measuring investment performance. Dividend income varies from month-to-month, but we average over $4k per month.
Besides income, I also track other data points every month — like dividend growth rates, capital appreciation, change in book value per share, growth rates, ROIC, shares outstanding, and half a dozen other metrics… as well as comparing current month’s against previous months, and previous years.
Hell, these days I even track how much sleep I get (or not).
Why am I so obsessed with measurement? Measurement is the key to modifying human behavior outside of our natural biological reward systems — e.g. food, sex, and so forth.
Measurement means being in control.
If I desire to maximize my financial output to provide for the future financial independence of my family, I simply can’t do that without measurement.
Want to change your life? Measure the behavior (or the output of that behavior) you wish to modify.
For example, if I want to lose weight, I could carefully count how many calories I eat, and how much exercise I get. Eventually I could drive those metrics in the right direction and start loosing weight.
If I wanted to minimize the money I spent on lunches, I would start by measuring my lunch spending. Eventually I would learn to start spending less on lunches.
Behavioral changes will happen once our brains see the numerical outcome of our behavior (in tangible form).
Seems obvious doesn’t it? The reality is, the vast majority of the world handles their personal finance like Average Joes — they hardly measure a damn thing.
Many simply claim not to have time…
Human time, energy, and effort is limited. As a parent of two boys, I understand this very clearly… my kids wear me out by the end of the day. If I’m not cleaning up after them, I’m teaching them, entertaining them, or trying to get them to sleep. I’m completely exhausted most days. But that’s no excuse!
Given my lack of energy, I simply try to focus on measuring the metrics that matter most in my life. It only takes a few hours a month, reviewing the numbers and putting them into my spreadsheets. (Much of that data gets presented here on this blog)
Anybody can do that. Don’t make excuses.
Your life is probably just as busy as mine, but don’t make the mistake of NOT measuring simply because of laziness. I implore you to make time for it. Do not underestimate the impact measurement can have on your finances.
It’s gigantic…. like Arnold’s muscles up there at the top of the page.
If you don’t exercise those financial-measurement muscles, your results will be weak and flabby.
Most of the financially independent people I know didn’t get paid ridiculous sums of money to retire early. We got paid normal salaries, and simply optimized what they had….exactly like the people detailed in The Millionaire Next Door.
Without measurement you can’t optimize. Without optimization you can’t have financial efficiency. So instead of the old saying “What gets measured, gets done”, I think the FI community really needs to adopt something like, “What gets measured gets optimized.”
Measure the right things, and you might just find yourself on the road to financial independence.