Do you know your financial status?
If not, you’re not alone. A recent Gallup poll found that only 32% of Americans have a household budget.
Furthermore, a recent Bankrate survey found that 55% of Americans don’t think their financial situation will improve this year, with 44% who think their situation will stay the same and another 12% saying they think their situation will get worse.
While you may feel your financial situation won’t improve, you are guaranteeing it won’t improve if you don’t know where you stand or if you’re actively ignoring your finances.
Like any path taken in life, you need to know where you’re starting so you know how far you’ll need to go before you reach your destination.
Every journey has a beginning, and you must know yours.
It’s important to be able to accept the things you did know, didn’t know, or ignored that have impacted your current financial situation. Only then can you build an effective financial plan.
You can start your journey any place or any time, but more importantly, start now.
Here are 8 critical personal finance numbers you need to know no matter where you are on your financial journey.
1. After-Tax Income
The first critical personal finance number you need to know is your after-tax income.
This means you must know what money you’re actually putting in your pocket every month (net) as opposed to your overall income (gross).
For those that are salaried, simply look at your paycheck to see what money you’re taking home every month.
After-tax income will be harder for those with a variable income or who freelance, but close estimations can still be made. Plus, if you’re income is variable it’s important to know how much it varies when making other financial decisions so you don’t overstretch yourself.
Knowing how much money you actually have to allocate is the first step in taking control of your financial situation.
Check out 2018 Tax Changes You Need to Know for more information about tax brackets and other important tax laws.
2. Monthly Expenses
Once you know how much money you have coming in you need to determine how much money you have going out. You also need to make sure you’re covering all your necessities and not overspending for non-essentials.
They only way to truly know what’s going out each month is to build a budget.
Many think of a budget as restrictive, but really it’s simply a way to track what you’re spending each month and on what. Once you know how much money is going out and for what, you can make changes based on your goals if needed.
Even those who have good cash flow must still have a general idea of their budget if they want to maintain their finances. After all, 33% of those making $50k-$100k live paycheck-to-paycheck, and 25% of those making $150k are in the same predicament.
There are five major sections to a basic budget. They are:
- Fixed Expenses
- Variable Expenses
- Debt Payment
Once you know how much money is coming in and going out each month, you can begin to make goals and to tweak your finances to meet those goals.
3. Debt – Total and for Each Loan
Yet another critical personal finance number you need to know is your debt. Furthermore, you need to know both your total debt and the balance for each loan.
While your total debt is the amount you owe overall, each individual loan likely has different terms, payments, and interest rates. Knowing the balances and terms for each loan (including credit cards) you have (including credit cards) will help you make informed decisions about which you should target first for extra debt repayment.
You may also investigate refinancing or consolidation depending on the situation.
In addition, you must also be aware of the minimum payments for each loan you have, as that will tell you how much you must pay toward debt every month to avoid penalties and other negative impacts to your financial health.
Acknowledging your debt may be difficult and overwhelming, but it’s necessary to know where you are, ensure you don’t add to the problem, and enable you to make a plan to get out of debt as soon as possible.
4. Savings and Savings Rate
While it’s extremely important to know your debt situation, it’s equally important to understand your savings and savings rate.
Many people ignore savings altogether, preferring to put it off until they’re older, make more money, or have less debt.
That’s a huge mistake.
Saving for retirement needs to happen in whatever amount and capacity you can manage because the length of time saving is more impactful than the amount saved each month.
In other words, a small amount saved monthly for more years will be more impactful than a large amount saved monthly for a few years.
With that being said, your total amount of savings and your savings rate are some other critical personal finance numbers you need to know.
Total savings include money in checking/savings accounts, as well as retirement accounts and other brokerage accounts.
On the other hand, your savings rate refers to how much of your take-home pay you’re saving/investing. There are many recommended savings rates purported that generally range from 10% to 20%, but you should aim to start wherever you can and then increase your savings rate annually.
First, assess how much you already have saved/invested, then, figure out how much you can put away per month to calculate your savings rate.
Remember, even if you have debt you should look to begin saving, even if it’s just a small amount at first.
5. Interest Rates (for Debt and for Savings)
Building off the two previous sections, some other critical personal finance numbers you need to know are the interest rates on both your debts and your savings.
For debts, it’s important to know your interest rate so you can make informed decisions about whether you should pay loans off on schedule or ahead of schedule.
For example, let’s say you have an auto loan with an interest rate of 4% and a credit card with an interest rate of 20%. In this situation, the credit card has a very high interest rate, so you should focus on paying that debt down first because it’s costing you the most money (5 times the auto loan).
- Start Taking an Interest in Interest: Credit Cards
- State Taking an Interest in Interest: Personal Loans
While many are already aware of the interest rates for their debts, it’s also important to know the interest rates for your savings, and to make changes accordingly.
The stock market ebbs and flows, but it’s imperative to know the average rate of return for your specific investment portfolio. You want to get the best returns for the level of risk you’re willing to take so that your money is working as much as possible for you.
Similarly, it’s a good idea to be aware of the rate of return you’re getting for your checking/savings accounts with your bank/credit union. Most offer a measly amount (less than a percent) for the privilege of holding your money.
While it’s a good idea to have some savings readily available, consider moving those funds to a higher yield savings account such as the one offered by Ally Bank.
Just because your money isn’t invested doesn’t mean you shouldn’t get the best return possible.
6. Credit Score
Yet another critical number you need to you know is your credit score.
Your credit score is a number ranging from 300 to 850 that represents your creditworthiness. In other words, your credit score is a representation of how responsible you are with credit and is used by lenders to assess the level of risk associated with extending you new credit.
Many people assume they’re being treated the same when it comes to credit, but you’re not.
The rates you’re offered on credit cards and loans, as well as the other loan terms, are all dependent on your credit score. Because your credit score determines your rates and loan terms, a bad credit score can cost you thousands in extra interest and years on your loans.
You have three separate credit scores from each of the major credit bureaus, but they all should be very similar.
If you have an account with Chase you can see your TransUnion credit score for free and Discover Credit Scorecard will let you receive your FICO score for free as well. You’re also entitled to a credit report from all three credit bureaus once a year.
7. Net Worth
Net worth is a number that many people are almost never aware of, but it’s an important indicator of your overall financial standing and becomes more critical as you move toward retirement.
Put simply, net worth is the sum of your assets minus your liabilities. It’s what you own minus what you owe.
In other words, net worth is all the savings, investments, and valuable items you own minus your debts.
Calculating net worth can be a little tricky, especially if you still owe money on assets such as a house. However, you can calculate equity by taking the current market value of your asset and subtracting what you owe.
Many people do not include depreciating assets such as cars in their net worth, but it is acceptable to do so if the item still has value.
If you owe more debts than you have in assets your net worth is negative, meaning you could sell/utilize everything you have and still not be able to cover your debts.
Obviously, a positive net worth reflects a more stable financial situation, and the higher your net worth the more you have in savings.
8. Years to Desired Retirement
Finally, another critical personal finance number you need to know is approximately how many years you have until your desired retirement age.
This number is important so you know how many years you have to save, and as a result, can plan for how much you need to save to be able to retire at your desired age.
While you can take your social security as early as age 62, full retirement age (and more money in social security) isn’t until at least 66 (depending on when you were born). Furthermore, retirement accounts typically have a minimum age requirement before you can access the funds without penalty (an IRA is age 59 ½ for accessing earnings).
With that in mind, if you hope to retire earlier you need to ensure you have enough savings to cover your expenses without social security, and potentially, without other retirement accounts for a few years.
Moral of the Story
A large portion of Americans have no idea where they stand financially, and as a result won’t be able to make any progress even if they wanted to.
Those with debt or other issues may be tempted to ignore the problem, but financial out of sight out of mind isn’t the way to go if you want things to change.
An important step in getting control of your finances is to know where you stand. The critical personal finance numbers you need to know discussed in this article give you snap-shot of where you are so you can make a plan for where you want to go and track your progress along the way.
It’s important to know your after-tax income, monthly expenses, debts, savings/savings rate, interest rates, credit score, net worth, and years to desired retirement.
No matter where you’re starting from you can always improve your financial situation.
Remember the 8 critical personal finance numbers you need to know to take control of your finances.
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