4 Personal Finance Calculations That Don’t Really Matter (And 3 That Do)

One of the hardest things about managing money is the information overload. The endless stream of personal finance calculations, figures, terms, and choices to keep track of. The overwhelming pile of metrics and numbers may make you not want to manage your money at all.

But the good news is, most of this stuff isn’t nearly as important as it pretends to be.

My personal philosophy, as well as that of this blog, is that life isn’t always about learning more. It’s often about learning less, and separating the clutter from what really matters. And money is no exception. So that’s what we’re doing today: clearing away some of the stressful money numbers (clutter) that someone may have said you “need” to know.

4 Personal Finance Numbers That Don’t Really Matter

Alright, this is an S&H blog post after all, and you know what that means (I’m aware that you probably don’t, but please don’t leave, that line was just for me). There are two components to improving almost any situation: finding what you can get rid of, simplify or reduce (Smarter), and then seeing what’s left that’s worth building on (Harder). 

In that spirit, let’s take a trip through some of the personal finance calculations we don’t need. The numbers that distract and overwhelm, rather than encourage and illuminate. And let’s throw ‘em out. With those out of the way, we’ll then be able to double down on a few numbers that really do make all the difference to a healthy life with money.

1. Interest Rates

There was a time in days of old when you could earn money through a magical force called interest. You would put money in a bank and this interest would grow and compound your money. The better the interest rate, the greater your ever-increasing pile of riches. Magical, yes?

Joking aside, it has been decades since bank accounts have offered people any meaningful interest payouts. And there’s no sign of them coming back anytime soon. Interest rates today range roughly from “pathetic” to “flat-out insulting.”

Simply put, a bank account these days isn’t going to make you rich. But it doesn’t need to.

Checking and savings accounts still serve other valuable purposes. And if they do manage to pull a few bucks in interest here and there, that’s great. But on the whole, I wouldn’t waste much valuable energy fussing over which account has the ideal interest rate.

How Much to Care About It

how much to care about bank interest rates graphic

Money in a checking or savings account just needs a safe home. It doesn’t need to grow super fast and make you a ton of money. Your investments will take care of that. Look for accounts with no fees at a decent institution. If the rates are better than most, that’s great. But really, even just a little above average is fine. In the majority of cases, we’re talking about pennies a month here, at best.

2. Debt:Income Ratio

I think we can keep this one pretty quick. Your debt-to-income ratio, if you’re not familiar, is the relationship between how much money you make, and how much debt you have.

I could give an equation, or examples, but honestly I’m not going to bother because this number is silly and has no place among useful personal finance calculations. 

The existence of this number implies that there is some level of debt that is fine, provided you make enough money. But no matter how much you make or how little you owe, debt still sucks! There is no crossover point where you should start sweeping your debt under the rug. This is a slippery slope to the leverage loophole.

There is also no level where debt suddenly becomes a problem. Debt of any size is a problem, in that it siphons off your financial resources, and offers nothing in return. Getting rid of it should always be a priority, regardless of proportions.

How Much to Care About It

how much to care about debt income ratio graphic

Pay down your debt aggressively, build your income hungrily, and don’t worry about any comparison between how much you make and how much you owe. One should have no effect on your mindset about the other.

3. Your Credit Score

I’ve said it many times before, and I will continue to do so: credit scores are not your friend. 

They are one of the most dangerous personal finance calculations there is. They are designed by lenders to measure how good you are at owing money, and entice you into owing more money. This is not a blue ribbon anyone should be trying to win.

Make choices and actions that benefit YOU, your money, and your financial future. Stop striving for a creepy, lingering pat on the back from the loan industry. 

A lot of bad money advice gets casually thrown around in the name of credit scores: Take out a credit card you don’t need; don’t buy the car in cash, take out a loan to boost your credit!

This reverent aura around credit scores is one of the most dangerous debt myths there is.

There is no need to obsess over these arbitrary bank points. Do not make financial decisions you otherwise wouldn’t make just for a credit score boost. Simply living a healthy financial life and paying your bills on time will give you all the credit history you need. 

How Much to Care About It

how much to care about credit scores graphic

Pay your bills, be financially responsible for your own sake, and your credit will tell that story. Don’t stress over what the banks want you to do, because spoiler alert: they want you to give them more money. 

One quasi-exception: DO take a quick look at your credit report from time to time. Keep an eye out for identity theft and other unexpected activity happening in your name, but forget about the points.

4. Your Average Rate of Return

Okay, so the number we’re talking about here is the % rate of return on your past investments. Invest $100, cash out at $110, that’s a 10% return. Average these out across your various investments and transactions, and you have your personal rate of return. Bingo bango.

So why am I telling you not to worry about this number? Unlike the interest rates and others above, this number has a huge impact on wealth-building.

There’s a bit of subtlety here, and since subtlety has never been my strong suit, please bear with me.

It is good to keep an eye on how your investments are performing. You should know if something gets out of whack, and needs adjusting. This is not the problem. The problem is obsessing over your personal performance as an investor like it’s a stat on a baseball card.

Good investing isn’t about being an extraordinary performer. A practically endless body of analysis has shown that low-cost, long-term index investing is the most reliable strategy for pretty much everyone.

In other words, if you’re investing the smart way, your average returns will be nearly identical to those of the market itself. Just ride the wave, because those who try to fight the ocean always lose in the long run.

And if that’s the case, then why waste any time worrying about your personal performance? 

How Much to Care About It

how much to care about average rate of return graphic

Beyond a waste of energy, this one can be dangerous to obsess over. Focusing on your personal rate of return reinforces the idea that investing is about your own skill in picking stocks and timing the market. It’s not. Hitch your wagon to the growth of the whole market, and be satisfied with the returns it yields. As long as your investments stay roughly in step with that, you’ve done a great job. This isn’t a sport.

3 Personal Finance Calculations That Really DO Matter

One of my main motivations for writing this article is to help you shift the emotional tide of dealing with your finances. So in the first half we turned away from numbers that create stress, waste energy, and ultimately hold you back on the road to financial freedom. And here we’re doing the opposite.

It’s important to stop worrying about numbers and equations that weigh us down. And it’s just as important to check the personal finance calculations that we can get excited about. Here are three – just three – numbers worth focusing on. Over time they will transform your attitude toward money and make a massive impact on your personal financial health.

1. Your Savings Rate

How much of your money you save is the most important factor in building wealth. And instead of fixating on any specific dollar amount to save, you will be better off focusing on your savings rate.

Your savings rate is the percentage of your income that you do not spend. If you make $500 in a month and manage to save $50 of that, then your savings rate for that month would be 10%.

personal finance calculations savings rate equation

Conventional wisdom suggests a savings rate of at least 10-20%. So-called extreme savers have been known to shoot for 80% and beyond (it’s more possible than you may think!) But none of these benchmarks is the be all and end all. Bottom line: the larger your savings rate, the more rapidly your financial life will transform.

You may have questions on the details of calculating your unique savings rate, such as:

  • Do I include retirement deferrals in my income?
  • Are debt payments part of my saving or my spending?
  • Is this pre-tax or post-tax income?
  • What about donations and gifts?

The way I see it, any money that entered my life is income. Any income that was used to increase my net worth is savings. And the rest, everything that left, is spending. 

Money In

Money Out

Money Kept

But in keeping with the theme of the article, don’t sweat the details of the above labels too much. Measure this one the way that works best for you. Just be consistent with it, and put all your extra energy into growing your savings rate over time!

how much to care about savings rates graphic

2. Your Time to Goal (TTG)

Okay, here is a fun one. But we have to be quick about it before I get arrested for using the phrase “here is a fun one” in an article about personal finance calculations.

One number I love checking, that you can also use to give you some excitement and motivation is your time to goal, or TTG as I’m going to call it (three-letter initialisms make things sound more official, I’ve done a lot of science on this).

personal finance calculations time to goal equation

What is your next big financial goal? Do you want to buy a house? Pay off the car? Spend three months backpacking through southeast Asia? Go see some Incan ruins? Give that goal a financial number (A) so you know what you’re shooting for. 

Now, how much are you contributing to that goal per month (B)? Divide A by B, and you have an estimate for how long it will take you to reach that goal. In other words, your TTG. Get excited about this number, watch it tick downward, start a countdown on your calendar, paint it on your forehead, and see if you can shrink it even faster!

how much to care about time to goal graphic

Focusing intently on big goals like this is how you build long-term motivation that lasts, even when things get difficult.

3. Net Worth Delta

You’ve probably heard somebody brag about their net worth, or rant about a celebrity’s assumed net worth. Maybe you’ve even calculated your own and compared yourself to said celebrity to see how you measure up. 

Net worth on its own is something I believe we focus on way too much. Sure, it can be helpful to know where you stand, and how you’re progressing. But similarly to the rates of return discussed in the first half above, tying your self-worth to financial performance is problematic.

But there’s a third word on here: delta, as in difference or change. Think journey, not destination.

personal finance calculations new worth delta equation

Forget about what you think your net worth should be or could be, or what anyone else’s is. All you need to know is that you’re moving the needle in the right direction. Instead of worrying about how much money you have right now, it’s better to make sure that it’s increasing over time.

Calculating net worth delta is pretty simple. Add up the value of everything you own (cash, bank accounts, investments and property all in one soup), and subtract from that everything that you owe (loans, credit cards, etc). This number is net worth. 

From there, all you need is to subtract last month’s net worth from this month’s. Yearly works, too. The result is your net worth delta: how much your wealth has changed over that time period. If it is positive, your net worth has increased. If it is negative, your net worth has decreased. In either case, the long term goal is to keep bringing up that delta, so that you can grow faster and faster!

how much to care about net worth delta graphic

Simple Finances are Healthy Finances

To sum up, while financial advisors and Wall Street suits and that guy Brad from payroll are all shouting at you about metrics, formulas, rates, and other complicated financial numbers… you can wave them off, and set your attention to just 3 personal finance metrics:

  • How much of your income you are able to keep (savings rate)
  • How long it will take you to reach your next exciting financial goal (time to goal)
  • How much you are increasing or decreasing your wealth over time (net worth delta)
Personal finance can be exhausting  and  overwhelming with all the numbers, figures, and calculations we're told to keep track of. But the truth is, most of them don't really matter. Check out these 4 personal finance calculations that don't matter, and 3 that do!

Are there personal finance calculations that stress you out or make you feel overwhelmed? What about numbers that lift you up and help to focus on?

One Comment

  1. Aine said:

    I think this article is especially important for folks like myself, who were raised in the “bank savings account/interest” era. It’s been very challenging to adapt to other ways of thinking about finances; but imperative that we do. Thanks for your insight.

    April 4, 2021
    Reply

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