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Financial Wisdom
8 Essential Financial Figures to Know
When it comes to overall financial health, there are several steps one can take to create a realistic and actionable plan to help sustain or improve their financial circumstances. The first step typically involves knowing where you stand on the financial front now, followed closely by defining your specific financial goals. Either step is a challenge if you aren’t sure what you can or should measure when evaluating your financial standings
For many, focusing on the most critical metrics in personal finance is a smart place to begin. Although it’s not exhaustive (and in no particular order of importance), it’s essential to know the following eight financial numbers to provide the groundwork for understanding and possibly improving your financial wellness:
- Credit Score: Your credit score is a three-digit number calculated by a credit scoring company and based on your unique financial details. Information used to calculate a credit score includes your total amount of debt owed, the type of debts you carry, your payment history of past and current debt accounts and any negative financial items such as tax liens, foreclosures or bankruptcies.
- Monthly Expenses: Another crucial financial number to know is the amount of money needed to cover expenses each month. To help make it easier on yourself, you can add up your fixed expenses; think rent or mortgage, debt payments and utilities. Then, estimate variable expenses such as entertainment, dining out, groceries, travel and shopping and them to your fixed expenses.
- Monthly Income: Similar to knowing your monthly expenses, understanding money earned each month is just as important. A general rule of thumb is to look back at the last 12 months and add up total income. It’s important to add all sources of income, above and beyond traditional salary and wages. Then, divide that amount by 12 to get a monthly average. However, individuals with a fixed salary or hourly wage may find calculating total monthly income a breeze.
- Cash Flow: The calculations for monthly expenses and monthly income are used in determining monthly cash flow. To figure out your cash flow, take your income and subtract out total monthly expenses.
- Debt Balance: Understanding what you owe to others is another essential financial number to know. To help keep your debt under control, it's important to take the time to add up debts owed, including mortgage loans, student debt, credit card balances, personal loans and car loans.
- Net Worth: To figure out your net worth, add up the value of your assets like your savings or retirement accounts, investments, property and vehicles then subtract your liabilities, such as mortgage balance, student loans and other debts owed.
- Savings Rate: To determine your savings rate, divide your amount of savings by your total monthly income.
- Retirement Contributions: Finally, knowing your retirement savings amount can be beneficial. Above and beyond knowing what you have saved toward retirement, it can be helpful to understand what your retirement contributions are or could be.
Each of these financial numbers plays a critical role. Some may seem less meaningful than others but they are all essential in knowing where you stand financially. You can then use that understanding to help define and ultimately work toward your financial goals.
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