Four numbers to manage for long term financial health
What is the first number we should be concerned about?
It’s your FICO or credit score. This number impacts not only your ability to obtain loans, but also the rate you pay on loans. It can impact your insurance costs, ability to get jobs or even your ability to get services such as mobile phones or even apartment rentals.
What is the score we should be striving to achieve?
A score over 700 is good and if you can get above 750 that means you are going to usually get the best rates available and over 800 is outstanding. Improve your score by paying your bills on time and using credit wisely which means not utilizing the full limit on your credit cards and not opening too many credit cards.
Is there a long term number that should be tracked?
You should know your retirement savings rate and it should be 10 – 15% of your salary. Your company 401k is a good place to start building towards that number. And if your company matches your contribution that can be a big boost to reaching the goal. Ultimately it is to have at least 10x your salary saved and reaching this percentage is the best way to hit that goal.
If we are underperforming in our retirement savings efforts how can we get closer?
It is good to focus on a percentage rather than a dollar amount because the dollar amount can be daunting. Work on increasing it just 1% per year and you will quickly achieve your goal. And make sure retirement savings is a priority over saving for college - you can borrow to pay for college but you can’t borrow to pay for your retirement.
Are there any short term savings numbers to be tracking?
One of the most important numbers to track is how many months of expenses you have saved in your emergency fund. It is really simple to calculate. Divide your emergency fund balance by your monthly expenses. Your emergency fund is one of the most important savings funds to keep your finances from getting off track.
What should be our goal for this number?
You really want this number to be at least 6 months and the ultimate goal is 12 months. Once you have reached the appropriate level, you can turn your savings to other activities such as college funding or other special expense categories.
What is one number people don’t consider but that they should be tracking?
It is net worth, add up all your assets - cash, savings, investments, personal property and subtract all of your debts, the resulting number is your net worth. The goal is to grow your net worth over time with savings and reduction of your debt. You may start in a negative net worth position but as your debt is reduced and you add appreciating assets it will grow over time.
One of your resolutions for 2018 might have been to improve your financial position. If you are looking to better your money situation then there are four numbers that you should be monitoring. It might be surprising that it doesn’t really involve your budget.