Whether you are new to financial literacy or a seasoned pro, there are some personal finance metrics you need to track at least once a year
Consider a doctor guessing your health status or a pilot flying without knowing how to interpret the cockpit dials
The same applies to the person who isn’t tracking these personal finance metrics
Knowing these numbers is not something to put off until later or to delegate to your partner; if it’s your life, you should know them, not just for knowledge’s sake, but so you understand what they mean for you today and your future.
Here are 9 personal finance metrics that you should track regardless of where you are in your financial journey.
This is your take-home pay after deductions, taxes, and so on. It is the amount that is actually deposited into your bank account.
This is simple for those with fixed income, but it is more difficult for those with variable income, though close estimates can still be made.
Knowing this number is essential when making financial decisions in order to live within your means and avoid overstretching yourself.
Your expenses are either essential or non-essential, and you want to know the total amount of all your essential expenses such as rent/mortgage, food, transportation, utilities, debt payments, and so on.
You want to know the bare minimum you’ll need to survive on a monthly basis
Some budget styles, such as the 50/30/20 budget, will guide you on what percentage of your income should be spent on essential expenses (50 percent for needs, 30 percent want and 20 percent for saving and debt payment)
Your cash flow is the lifeblood of your finances, it measures the movement of your money.
Cash flow equals net income minus expenses.
The objective is to have a positive not negative cash flow, consider your cash flow to be the amount you are able to save from your salary each month
If you want to buy things without taking out loans, grow your savings, or even start investing, you need to start with a positive cash flow.
Your total savings includes money in your savings/current account, retirement accounts, and other investment accounts.
Your savings rate is the percentage of your monthly net income that you save/invest.
Your savings rate is significant for a number of reasons.
There are many rules of thumb regarding savings rate and some are linked to budgeting styles like 50/30/20.
The most important thing is to know your current rate and increase that percentage as much as you can
In the past, I associated this term with millionaires or billionaires, but this term is for everyone; in fact, it can be said that this is the most important financial metric to track as you progress through life.
Your net worth is simply the sum of your total assets (what you own – home, cash, savings, investments, and so on) less your total liabilities (what you owe – debts, mortgage).
If your debts exceed your assets, your net worth will be negative, which means that even if you sell everything you own, you will not be able to pay off all of your debts.
Your goal should be to increase your net worth on a yearly basis.
There are numerous ways to conduct soft credit checks with various companies so it’s very easy at the click of a few buttons to know this number and get a monthly updates
Your credit score reflects your trustworthiness to lenders; the higher your score, the better.
The following factors affect your credit score:
A low credit score can affect the interest rates you receive on loans. It can also affect your ability to rent, obtain credit cards, and so on.
Check your credit score at least once a year to ensure that there is nothing wrong with your credit report. Keep your credit in good standing.
We don’t pray for emergencies but how prepared are you if one occurs? Emergencies such as losing a job, replacing an expensive item, and so on
It is prudent to protect yourself from such calamities, and this is where your emergency fund comes into play.
How much money do you need to put aside? Three months’ worth of expenses is a good rule of thumb.
If your bank and credit card company are aware of this figure, you should be as well.
Your total debt is the total amount you owe, and while this is important to know, it is also important to know the amount for each debt if you have more than one.
If you have multiple debts, arrange them from smallest to largest, taking into account their terms, minimum payment, balance, and interest rates.
This will allow you to make an informed decision about which debt to prioritise with extra funds while making minimum payments on the rest.
It may also be worthwhile to look into other options such as balance transfers, refinancing, or consolidation, as well as seeking assistance if necessary.
How much money do you need to retire? Your FI number will tell you how much money you will need to become financially independent or retire.
An estimate of this number is good to know to see where you stand on your path to Financial Freedom.
A rule of thumb is to use the 4% rule which says that you need 25x your annual expenses to retire without running out of money
For example, if you live on £30,000 a year you need £750,000 to retire and not run out of money if you live on 4% of your investment
Knowing these numbers is powerful because it helps you understand the current state of your finances and with that information you can plan for the future and set goals.
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