What Gets Measured
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.
Measuring Things
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 Effort
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.
Conclusions
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.
Metrics are definitely needed to measure the success of anything and anyone. The average Joe measures his income and retirement, but not his expenses and saving rates.
However, there are a lot of things in life that are not that easy to measure such as the impact of a policy, a law, or a regulation. Spurious relationships, unclear causality, and confounding variables are sometimes impossible to parse out.
That said, when it comes to personal finances, I believe 4 things are key: income, saving rates, expenses, and return to investment.
How do you measure someone’s happiness resulting from all that? I guess without asking the person directly, you can only guess based on the metrics that you select and can observe.
“Measurement means being in control. ”
Yup. That’s me. Being a control freak, I do love measuring the shit out of everything. Because otherwise, how will you know you’re winning? 🙂
Human beings are driven by goals. Once we have one in place (that we want), we drive towards it and measuring our progress gives us that emotional high that keeps us going. That’s why it’s good to have milestones along the way when you’re trying to achieve a long term, big goal like FI. You want to celebrate the small wins along the way, so that you’re motivated to get to the end goal.
Great article!
Thanks FIRECracker!
I couldn’t agree more. I’m a BI analyst by trade. And this is what I’ve made a career on.
You measure something and it brings it into view. And just that exposure causes people to naturally want to increase (or decrease) the number. It’s actually quite amazing.
Great post. It put into words something I’ve experienced and never really could.
Thanks Mr. WoW! I think I’m going to come back and read this nice comment again when I’m having a bad day. 😀
Amen. It surprises me that more of my old accounting coworkers aren’t FI. They are measurement obsessed. Except for where it would do them the most personal benefit.
Also, I am human or cephalopod.
Ha I know why my coworkers are not FI either. I see them driving in brand new cars every few years, and spending a lot of money on status items. A few of them have financial advisers from a money grubbing company ( which is a dividend achiever, so I can’t complain)
Yeah, that is strange. I’ve noticed a certain split personality situation for many humans — who they are during working hours, and who they are during non-work hours.
The two can be drastically different!
Those are a hole lot of precision tools, particularly the muscles. I am a huge Arnold fan so I suppose I must start taking your advice. We were using Mint to measure our spending but it was driving my wife crazy. I am using Clarity now but may go back to mint. In May we are going to try a low spending month. We will let you know how it goes.
Cool. I don’t bother with any fancy online tools. Just spreadsheets. It might take slightly more work, but it’s only a few hours a month anyway!
I love the concept of ‘measure twice, cut once’, however, there is a flipside. Here are two quotes that I love, from who I consider highly successful people:
“Not everything that counts can be counted, and not everything that can be counted, counts.” – Einstein
“Don’t count the things you do, do the things that count.” – Zig Ziglar
We have become a nation of busy-ness, and with over 2/3rds of Americans unhappy, I’m not sure that to-do lists, SMART goals and constant measuring (and therefore comparing) is good for our mental health and fulfillment.
I once read a book called “How the Hippies Saved Physics”. There is a chapter called “Shut up and calculate”. It talks about how the older scientists were also philosophers and would have wild conversations about crazy ideas. Then, after WWII, the government realized how important physicists are to war, so they wanted to churn out a bunch. However, they didn’t want them pondering, but rather, just calculating. It turned out, that they just didn’t grasp the concepts as well without the deep thinking and the stuff that you can’t measure. It is also interesting that happiness peaked right after WWII and has been declining ever since. Coincidence? I think not.
So, I can track and measure all day long, but will that bring me deep fulfillment? No. That is why we need a balance.
Primal Prosperity recently posted…Why You Need a Balance Sheet for Your Soul
Interesting thoughts Primal Prosperity! For certain, *anything* can be taken too far.
Di
I agree 100%. This is especially true when it come to finance. We thought we live modestly, but when we started tracking our cash flow, we found a lot of leakage. Once the problem is clear, it was easy to fix.
Losing weight is a lot harder for me, though. I really should keep track of what I eat.
Modifying food intake is a big part of losing weight. You can spend hours at the gym and burn a few extra hundred calories, but most calories are burned outside the gym.
I agree that measurement of your progress is important. I also agree that optimizing your situation is important as well. However, I also try to get into the habit of stepping back and looking at the big picture, to make sure am I not missing out on anything by perfectly hitting my goals.
Absolutely. If optimizing what you’re measuring doesn’t add up to accomplishing your goals, there’s probably no point!
There’s some irony in the pictures used for this article, showing some of the most baffling measuring units of the civilized world 😉
I didn’t mean *that* kind of metric. 😛
If I didn’t know better, I’d think you were trying to pick a fight about which measurement units are superior.
Thankfully, I don’t have a cat in that fight. 🙂
Metrics are important, but I don’t set hard goals. I have a general goal each year that I want to achieve. Strict goals are too hard to achieve because there are always unforeseeable things every year.
Nothing wrong with either strict or soft goals…as long as you’re making progress! 😀