You often hear doctors tell you to "know your numbers" when it comes to your health -- your cholesterol, your blood pressure, and so on. Well, in personal finance, it's also critical that you "know your numbers." These figures will help you assess your financial health and see whether you're on track to achieve your financial goals.
Here are three telling financial numbers that can reveal a lot about your finances.
A yearly financial checkup can greatly improve your financial well-being. Image source: 401kcalculator.org via Flickr.
1. Savings
Let's begin with your assets and your overall savings rate. How much you need to save is dependent on what your long-term goals are. For many people, retirement is their No. 1 priority. In order to figure out what percentage of your income you're saving for retirement, add the amount you're saving plus any employer match, and then divide the total by your gross income. A savings rate of 10% is often recommended, but given the decline in pensions, the uncertainties surrounding Social Security, and our increasing life expectancies, putting away about 15% of your gross income is a better bet.
If you have other goals, such as saving for your children's college education or some other large expenditure, then you will need to save more. Note also that this savings rate does not include what you have in your emergency fund, which you can learn more about here.
2. Debt
Next, you'll want to analyze your total debt, including your mortgage, student and auto loans, and credit card debt. While everyone's situation is different, there are some broad industry standards that financial experts use to evaluate your debt levels in order to gauge your ability as a borrower to pay off your debts.
While debt is often necessary to achieve goals such as getting a college education or owning a home, your debt should always remain manageable in relationship to your income. One sound benchmark to adhere to is the 36% rule: The total sum of all your debts should be no more than 36% of your gross income. To determine your debt-to-income ratio on a yearly basis, divide your total yearly debt payments by your yearly gross pay. For example, if you make a yearly salary of $50,000, then you do not want to have debt repayments totaling more than $18,000. To break it down even further, divide your answer by 12 to see what your monthly limit should be. Ultimately, while the 36% rule is a general barometer, the more income you spend servicing debt, the less financially secure you'll be.
3. Credit score
Finally, you should get in the habit of checking in every year on your credit scores -- that's plural, because everyone has three scores, one from each of the three major credit bureaus: TransUnion, Experian, and Equifax. (That said, these three scores should be pretty similar.) Your FICO score, as it is called, will range between 300 and 850, and the higher your score, the better. You can obtain your scores from various websites, including each credit bureau, myFico.com, as well as other sites.
Your credit history is a direct reflection of your ability to manage money and borrow responsibly. And your scores directly impact the interest rates you'll be offered as you move through life and borrow money for anything from a home to a car. The higher your credit score, the lower the interest rate you can obtain. While there are a variety of factors that affect your score, your payment history -- which includes late payments, missed payments, and outright defaults -- can have the greatest impact on your overall score, so always be sure to pay at least the minimum amount due on any debt.
In addition, once a year, you are entitled to a free copy of each of your three credit reports (but not scores) from AnnualCreditReport.com. This is a great opportunity to go through each report and confirm that all the information is correct, as a mistake may lead to a lower score.
Personal finance, like your health, requires active management. You need to make an honest assessment of your (financial) well-being and work on anything that's not going right to make sure you're (financially) healthy.
