Many people use their credit scores to gauge their financial health. Maintaining good credit is especially important to your ultimate financial goals. Of course, monitoring your credit score is a sound financial practice. However, your credit score is by no means the only way to measure whether or not you are making progress on your personal finance goals.
Here are four other vital numbers to help you track your financial health.
1. Your Personal Savings Rate
Your “personal savings rate” is the percentage of gross income you put into a savings account or investments every payday. Of course, for many of us struggling with the financial impacts of COVID-19, saving anything at all can be tough. But, under normal circumstances, a lifetime saving of 10%, may be all you need to hit your financial goals. This can be your “average” savings rate. If saving is a struggle, as it could be right now, try to catch up later with a higher savings rate.
2. Your Real-Life Ratio
The real-life ratio measures your ability to afford a home while also paying costs such as daycare and car loans, and saving for the future. You’re in good shape if your housing-related cost, savings, daycare, and non-mortgage debt take up 75 percent or less of your after-tax pay.
3. Your Personal Inflation Rate
The national inflation rate published in various financial newspapers and websites is based on a summary of how much living costs are changing for a fixed basket of goods and services relevant to consumers. Your own experience may very well differ. To determine your own “personal inflation rate,” calculate how much your biggest expenses have risen and then compare that amount with any increases in your income. When inflation rises more than income, you are falling behind. If you are not capable of increasing income, then the only way to try to bring down your personal inflation rate is to cut back on expenses wherever possible.
4. Your Net Worth
Credit scores and the numbers mentioned above are great ways to gauge your financial health. But you really need to consider your net worth, to see if how well you are doing at actually building wealth.
Net worth is the total dollar amount of your assets – home value, investments, cash in savings – minus the amount you owe on your mortgage and other debts. If you’re a homeowner, consider yourself on the right track if your net worth turns positive by your early 40s. This signifies you have paid off a serious chunk of your mortgage and built savings and investments. From there, aim to boost net worth steadily by saving, investing, and keeping debt in check.
Have you checked these personal finance vital signs? How healthy are your finances? Where do you have to make changes?