Staying on top of your finances is like exercising regularly: From an outside perspective it seems like a complicated and difficult path, full of hardship and stress. In practice, it’s just about developing solid habits and sticking to them.
The truth is, you don’t need to know your finances inside and out in order to have things under control. You just need to stay up on a few important metrics that gauge how you’re doing in certain areas, giving you a snapshot of things like your assets, your investments and your financial responsibilities.
Here are the most important metrics to track, and how following them can improve your financial health.
Your net worth is calculated by subtracting your liabilities (how much you owe) from your assets (how much you own). Net worth is an important calculation because it helps you understand your financial big picture. People with high incomes can have a negative net worth if they carry a lot of debt, so it’s a solid barometer of financial success.
You should track your net worth regularly to see if it’s going up, which would happen by reducing your debt, saving more money, or increasing the value of your assets.
Your monthly cash flow is how much you spend minus how much you earn. Knowing your outlay versus your input can help you see if you’re outspending your income or if you have a big surplus to work with.
A cash flow deficit can result in high credit card balances or an inability to save for retirement. Keeping a positive cash flow is the most fundamental aspect of personal finance: spend less than you earn.
I’ve coached people who discovered they weren’t able to pay down their student loans or adequately save for retirement because they have a negative cash flow. It may sound obvious, but it’s also an issue that lots of people struggle with.
Most people with debt have a vague idea of how much they owe. Maybe they know their monthly payment or what their original balance is, but years of capitalizing interest can skew that figure.
Look up your total debt, including your mortgage if applicable, and write down that figure. Then, write down how much you pay every month. Seeing the figure in front of you will help you be more aware of what you owe, how it’s affecting your life and whether or not you want to speed up the repayment process.
You can go a step further and also track the interest rate for each debt and whether it’s fixed or variable.
Your credit score doesn’t reveal your income, debt or how much you have saved for retirement. Instead, it shows how trustworthy you are as a borrower. Credit scores range from 300 to 850, with good credit starting at 700. The higher your credit score, the better interest rates you’ll qualify for and the easier it will be to take out a loan.
You can find your credit score for free at sites like Credit Karma. Some credit card companies also print your credit score on your monthly statement.
Percentage Saving for Retirement
Most experts recommend saving between 10-15% of your income for retirement, so it’s vital to track how much of your salary is going toward that goal.
Add up your 401k, IRA and other retirement contributions and divide it by your gross income. You should also include how much your employer matches, but only if you plan to be 100% vested before you leave the company.
As your salary increases, so should your retirement contributions. Otherwise, your percentage will decrease.