With 2017 in sight, now is the perfect time to get personal finances in order and start the new year off right. A great place to start is to figure out your personal finance numbers. But with so many numbers and terms out there, it’s easy to get lost trying to figure out what you really need to know. What numbers are the most important? Here’s are 6 numbers to know to help you get started.
1) Credit Score
A credit score is a number that represents your creditworthiness to companies who may do business with you. The score is based on multiple factors including how long you’ve had credit history, whether you pay your credit cards on time, and how much credit you utilize.
A variety of credit score scales exist. Credit scores typically range from 300 to 850 with higher numbers being better. In general, scores above 700 are considered good to excellent.
When you have a high credit score, you’ll find more doors open to you. You may qualify for lower interest rates on loans, which is important if you’re making a large purchase like a house or car. You may qualify for credit cards with lower rates and better perks. Your score can also affect job offers and rental opportunities.
How do you find out your credit score?
Contact one of the three major credit bureaus – Equifax, Experian, and TransUnion – and pay a fee to see your credit score.
Check with your bank or credit card company. Some banks and credit card companies offer free access to your credit scores for being a customer.
Research and join a reputable website such as Credit Karma which provides an estimated credit score for free.
On a side note, each of the three major credit bureaus mentioned above provides a free credit report annually. Note that a credit report is different from a credit score. Viewing your credit report regularly is a great way to check on your credit health and ensure there’s no fraudulent activity in your name. Try scheduling reminders to obtain one report every four months, such as in January, May, and September, for the most frequent checks.
Knowing your income is the foundation for accurate budgeting. When you know how much you earn, you can determine how much you can spend. You can also make well-informed decisions to prepare for the future.
How do you calculate your income before taxes (gross annual income)?
If you’re paid an annual salary, you can divide your salary by 12 (months) to determine your monthly pay.
If you’re paid hourly, you can multiply your hourly wage by the number of hours you work each week, multiple that by 52 (weeks), and then divide by 12 (months).
As a general rule of thumb, if you work a full-time job at 40 hours a week and that job pays by the hour, you can determine your yearly income by doubling your hourly wage and tacking on the thousands. For example, a person who makes $20 an hour would make approximately $40,000 a year.
If you’d like to calculate your take-home pay, that requires determining your taxes, retirement contributions, and so forth. Several online calculators are available to figure out your take-home pay.
It’s so easy to spend money. With groceries, utility bills, housing and car expenses, your money can easily disappear. But if you keep track of your expenses, you’ll know exactly how much you spend, what you spend it on, and how much you have left over for other things in your life. In addition to knowing your income, determining your expenses is a key part of maintaining a budget and a financially sound life.
Many people don’t know how much debt they have. It may be scary to look at the numbers. Or they may have many loans and don’t add them up. With the new year coming, now is the perfect time to figure out that amount. Add up credit card debt, car loans, student loans, personal loans, and so forth. Then start making a plan to get that number down.
5) Net Worth
Your net worth is how much money or value you have to your name. To calculate your net worth, add up everything you have of value (e.g., cash, savings, investments, accounts, property, cars, etc.) and subtract all your liabilities (e.g., loans, credit card balances, additional debt).
It can be scary to look at the number, especially if your net worth is negative, but this is important for future financial planning. If you find yourself in the positive, that’s great! Keep it going!
6) Saving rate
A saving rate is a percentage that expresses the amount of income out of a person’s after-tax income. The average American household saving rate is below 6% in 2016. While no perfect percentage exists, financial advisors typically suggest setting aside 10-15% of income towards saving for retirement.
How to determine your saving rate?
First, add up all your income after taxes. Don’t forget any investment income, side income, or employer contributions to retirement accounts.
Then, add up all the money that you didn’t spend this year. This may be money in checking or savings accounts, investment accounts, or cash.
Divide the amount of money that you didn’t spend by your total income and multiply that amount by 100. This will give you your saving rate.
For example, if you made $100,000 this year and you didn’t spend $20,000 (meaning you saved that amount), then 20,000/100,000 x 100 would equal 20%. Your saving rate would be 20%.
If you find your saving rate below 10%, consider increasing that rate in the new year. Even small or incremental changes make a difference. If you’re saving more than 15%, that’s great! Challenge yourself to find ways to increase that percentage if you want to save more in the coming next year.
There are so many numbers and terms thrown about when discussing personal finances that they can leave your head spinning. Start with the numbers above as a foundation for understanding your financial health. Once you know these, you’ll be in better shape to make gains in the new year. If you’re interested in writing financial goals, check out recent posts on how to make SMART goals with a free worksheet and tips on how to keep New Year’s resolutions.
What are your thoughts on these personal finance numbers? Do any of these surprise you? Are there are others that you think are necessary to know?
Credits: Nerdwallet.com & money.usnews.com