How do you know if you’re really making progress with your finances?
You don’t necessarily need to be across every cent and every market movement, but keeping track of a few key money metrics will tell you if you’re heading in the right direction. Numbers don’t lie!
Keeping on top of these stats is pretty straightforward and will (hopefully) help you stay motivated and get ahead financially.
A credit score is a three-digit number assigned to you that indicates how reliable you’re likely to be as a borrower. (A credit score of 700 or more is generally considered a good score!) Sites like Credit Karma enable you to get a free copy of your personal credit score.
Lenders use credit scores to help decide who qualifies for a loan and on what types of terms. The higher your credit score, the lower the risk you’re considered to be – meaning you’ll likely qualify for better interest rates and higher limits should you need to apply for credit.
Banks aren’t the only companies that look at your credit score, though. If you’re renting, landlords may consider your credit score when evaluating housing applications. Utility companies and insurance companies may also take your credit score into account. Even if you’re not in the market to borrow money anytime soon, it’s always a good idea to keep your credit in good shape.
There are different ways of calculating credit scores and your credit score can vary depending on which credit bureau it has come from (in the US, the main ones are Experian, TransUnion and Equifax). Not all lenders report to all of the credit bureaus, or in the same way.
Factors that can affect your credit score include how often you make payments on time, the age and types of accounts you hold, and your credit utilization ratio (your credit limit vs how much you owe).
Do you know how much you spend in a regular month? If not, it’s time to work out your monthly nut figure – your basic expenses in life. This isn’t about budgeting or aspirations, it’s about being realistic and facing up to how much you actually need to get by!
A lot of our regular bills are fixed and can’t be easily reduced. Think housing, utilities, possibly transport … and any obligations like student debt or other loan repayments. Then there are the more discretionary costs that you have some control over, like food, entertainment, clothing, etc.
Knowing what your basic outlay is will quickly highlight any cash flow issues. Money in needs to exceed money out. If you feel like you just can’t get ahead, your spending might be exceeding your income.
You can look over your bank statements to review transactions and see what you’re spending in different areas. Actively tracking your spending for a month can also help you get a handle on things, and there are lots of apps out there to help you do just that.
If you’re carrying debt, are you aware of exactly how much you owe right now? The total figure can be quite confronting, especially if you have a big mortgage or have lots of debts spread across various loans and credit cards.
Knowing exactly what you owe, along with what you pay each month, can help you see what an impact debt has on your bottom line. (It’s also a good idea to understand how much of each payment you make consists of interest vs principal.)
If your total debt is reducing every month, that’s a great sign of progress. And if not, that might spur you to make some changes to your payoff strategy!
Your savings rate is the percentage of your income that you’re putting away for later. The higher the better! If you’re earning $4000 a month and saving $1000 of that, that’s a 25% savings rate.
Obviously, if you’re just starting out in your career and making an entry-level salary, your savings rate may not look all that impressive – and that’s okay. The key is getting into a regular savings habit from the start, setting a good foundation for the future. As your income increases over time, so should your savings rate.
If you don’t have an emergency fund, saving for a rainy day should be a top priority. Other savings goals could be for travel, a car, or a down payment on a house.
Retirement Savings Rate
It might seem a long way away but we all need to be saving for retirement – specifically, around 10-20% based on common rules of thumb. That’s why we’ve called this metric out separately! Compounding interest is on your side here, so the earlier you start, the better. Be sure to take advantage of any contribution matching offered by your employer; that’s basically free money for the taking.
We all know it’s not necessarily how much you make, but how much you keep (see above re: savings rate). How many articles have you seen about six-figure households struggling to keep their heads above water?
That said, if your income isn’t keeping pace with inflation, in reality you’re sliding backwards. Wage growth matters! Earning cost-of-living increases in the low single digits is a good start, but focusing on your career and growing your income in larger leaps and bounds is what can make a huge difference in the long run.
Net worth is probably the single best indicator of your overall financial health, and worth updating frequently to see the full picture of where you stand. Ideally, this number should be going up as you save, invest, and pay off debt.
So what is it, exactly? Net worth, in a nutshell, is the difference between what you own and what you owe. We calculate net worth by adding up all our assets and then subtracting all our liabilities.
Assets are things you own that have value, like property, vehicles, business, stocks, and cash. On the other hand, liabilities include mortgage, loans, credit card balances – basically any debts.
Working out the value of the balances in your bank accounts or investment accounts is fairly easy. However, with assets such as cars or jewelry that would need to be sold in order to convert them to cash, you may need to take an educated guess at what they’re worth.
If your end net worth number is in the green, congratulations! If your debts outweigh your assets, then it’s time to tackle those liabilities and grow those assets.
“Sometimes it’s better to spend an hour thinking about money than to spend a week working for it.”
Managing your money doesn’t have to chew up huge chunks of your free time! But taking an hour here and there to get better acquainted with your finances is an investment that will pay off in the long run. After all, you work hard for your money, so make sure it’s working for you too.