“You can’t manage what you can’t measure.” This adage is certainly true when it comes to your health metrics—such as blood pressure and cholesterol. The same can be said for your key financial indicators. Keeping tabs on the metrics that matter can help you make smarter choices about how you manage your money. Here are 5 metrics that matter and why you should keep track of them:
Know your net worth
Net worth is calculated by subtracting what you owe (liabilities) from what you own (assets). Knowing your net worth will help you understand your current financial position. Being familiar with this metric will serve as a reference point for measuring progress toward financial goals. Over time, your net worth should grow and if it doesn’t, you may need to work on saving more and spending less.
Understand your debt-to-income ratio
Lenders use this number to assess your ability to carry additional debt. To calculate DTI, sum up your total monthly debt payments (i.e. mortgage, auto loan, credit cards) and divide them by your gross monthly income (the total household earnings before taxes, insurance, and other expenses are deducted). Ideally, your DTI should be less than 36%. When it extends beyond 43%, your debt burden may be dangerously high, limiting your ability to take out new loans or secure favorable rates.
Keep track of your credit score
The higher your credit score, the easier it will be to take out a loan and perhaps with more favorable rates. FICO (Fair Isaac Corporation) scores range from 300 to 850, with good credit starting at 700. FICO takes into consideration a variety of factors when calculating a score, including your payment history, the amount of available credit used, the length of credit history and the types of credit used.
Review your cash flow
Do you struggle to make ends meet? Keeping track of your cash flow will help you determine if you are financially over-extended. The goal should be to have a positive cash flow, meaning you spend less than you earn. To calculate your monthly cash flow, subtract your fixed and variable expenses from your total household income. If your review uncovers a cash flow deficit, you need to establish a budget and track your spending to regain control of your finances.
Create an emergency fund
An emergency fund should consist of three to six months’ worth of household expenses to help you weather a crisis. Ideally, your emergency fund should be liquid and saved in an account that you do not frequently access. If you struggle with debt, aim to save a minimum of $500 to start with and build from there.
By tracking these five important metrics, you will be on your way to managing your finances in a way that gives you peace of mind and leads to a healthier you. For additional practice, explore the Healthy Financial Habits module on Your Financial Best.