I’ve met a lot of people in the finance world over the years. I’ve met the ultra rich, poor, and in between. I have met CEOs, retail workers, doctors, and freelancers. What I have noticed is that those most successful financially can recall these seven figures if asked. You tend to remember numbers most important to you. For some reason, financial numbers elude most. How many of you can recall these seven important financial numbers?
1. Net Worth
Your net worth is the value of your assets (the things you own), minus the liabilities (what you owe). This important figure is one of the best measures of someone’s financial stability, more so than income. For instance, you can have a CEO that makes $1,000,000 annually have a lower net worth than someone else that makes $150,000. Let me show you why.
The formula:
Assets - Liabilities = Net Worth
Examples of assets:
Checking accounts, savings accounts, retirement savings, real estate, vehicles
Examples of liabilities:
Consumer debt, personal loans, student loans, mortgages, auto loans, other debt
Reminder: Income is not included in a net worth calculation.
So, what is your net worth? Are you surprised by that figure?
2. Income Post-Tax
Post-tax income is the money that is actually going into your pocket each month. On your paycheck, this will be the net income amount. In order to adequately take control of your finances, you need to know this number. For instance, when creating your budget, in order to know how much money you have to pay yourself and your expenses depends on the amount you have coming in. In order to take control of your finances, you need a budget. In order to budget properly, you need post-tax income.
3. Expenses
Your expenses are everything you have to pay for any given month. You may have fixed expenses like a subscription or car payment, and variable expenses like your electric bill and groceries. Both are important to know.
The best way to do this is to review a couple month's worth of statements and writing down every expense. For variable expenses, you will simple list an average over a few months time. Calculate a total. Compare this total to your Post-Tax income figure. What is your total? Are you spending more than you take in?
A best practice is to review these expenses periodically and determine which are non-essential. Then, consider eliminating this expense. By doing so, you can move the remaining funds to either debt or savings.
4-Debt balances and rates
Other critical numbers you should know by heart are your debt balances and their rates. You should have a plan for each of your debts for payoff. A good rule of thumb is to pay the debt your are incurring the most interest on first.
Make sure you pay attention to due dates and minimums. You do not want to incur any additional penalties or fees because you overlooked this critical matter.
Debt can be very stressful, but it isn’t one of those things you place out of sight, out of mind. It will compound and become unmanageable. Unmanageable debt will impact every area of your life. So, start tackling head on.
5-Emergency fund goal and balance
Have you established your emergency fund? An emergency fund is an account with money set aside to pay for large, unexpected expenses, such as: unforeseen medical expenses, home repair, car fixes, and unemployment. Emergency funds provide a buffer. It allows you to have access to funds for these unforeseen expenses instead of having to rely on credit cards or going into debt.
To begin an emergency fund, open a separate, quickly accessible, savings account with whatever you can afford based on your financial situation. Make sure you aren’t incurring a fee. Ideally, you should begin your account with enough to cover at least one large expense. I’d recommend at least $500. But, even starting the account with $50 is a great start! You are taking an important, life changing step to financial wellness. But, keep building. You want your account to be equivalent to six month’s worth of expenses.
6-Credit score
Your credit score is an important figure creditors review to see if you are worthy of extending credit to or not. Basically, this figure represents how responsible you are with your money. For instance, paying bills on time. This score ranges from 300-850.
When calculating this score, several figures are taken into consideration. These are: payment history, debt to credit ratio, length of credit history, new credit, and the amount of credit you have.
Your credit score has a huge impact of a variety of financial situations, not just extending credit, like a mortgage. For instance, you credit score affects the rate you receive. It can impact employment. In addition, your credit score is often checked with you are applying for housing, mobile phone plans, and when setting up some utilities.
7-Amount you need to retire.
If you don’t know the amount you need to retire, how can you really set realistic and accurate financial goals? You can’t. The number you find on your calculator might be daunting, but it will make goal creation and planning much easier. Also, it will help you determine which financial strategy is best for your situation.
It is never too early to start saving for retirement. But, saving is not enough. Investing is key. Think 401K, IRA, etc. If you are interested in starting a retirement account, be sure to educate yourself on the financial products available to you. Don't be afraid! Start now. One of the biggest financial regret people face when they are older is their failure to start saving for retirement earlier.
Let's review. The seven personal finance numbers you should know by heart are net-worth, income post-tax, expenses, debt balances and rates, emergency fund goal and balance, credit score, and the amount you need to retire. Do you have a better understanding of your finances now that you can recall your personal financial numbers? I hope so! I suggest taking it a step further and keeping track of your financial journey with a financial journal or planner and review often. Couple this with a budget, and you will be well on your way to financial wellness.
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