5 personal money numbers everyone should knowApril 9, 2017
This original article was written by Christy Rakoczy for Mic.
You might know your weight and your (pre-tax) income. But how much do you really know about your full financial situation? Your salary and monthly pay are definitely not the only figures that matter.
In fact, you might think of yourself as responsible, but several other numbers will show whether you’re truly doing well managing cash — or if you are actually headed for financial trouble. Think of these as grades on a “money report card” you can create for yourself to see you’re on track.
Here are five of the key personal numbers you need to know, and the steps you can take to calculate them easily.
1. Your “overhead” ratio
Your overhead ratio is the amount of necessary expenses you have, compared to your income. This number tells you how much of your income is taken up by essentials. High overhead is trouble because it can prevent you from saving.
Calculate your overhead ratio by adding up all the stuff you have to pay for every month: rent, utilities, commuting costs, taxes, insurance, food and minimum payments on your loans. Every essential expense and obligation should be included.
Then, compare this to your monthly income and calculate what percentage of your income is going to essentials. If your expenses are $1,800 monthly and your income is $2,000, you’re spending 90% of your income on essentials.
If you’re spending too much on necessary expenses, you cannot put away the recommended percentage of your income for retirement and won’t have money for discretionary spending. This may lead to debt.
Many financial experts recommend a maximum of 50% of your income go towards necessities. The 50/30/20 budget method, a popular budgeting option, depends on keeping essential expenses to only 50% of income. This allows you to use 30% of your income for wants and save 20% of income.
2. Your debt balance
When estimating debt, American households estimated they owed around $440 billion in credit card debt in 2010, which is just 60% of the $731 billion lenders said was actually due, according to a 2015 study published in FRBNY Economic Policy Review.
When it comes to student loans, debtors were also off, with households estimating they owed only $578 billion instead of the true $778 billion.
You need to know the full total amount you owe on all your debt. Sign into your online statements for student loans, auto lenders, credit cards and anyone else you owe money and add up your outstanding balance. Double check your data to make sure you didn’t miss anything using your credit report, which you can get for free at AnnualCreditReport.com.
Know your number so you can be realistic about setting financial goals. You don’t want to carry debt with you into retirement, for example, so find out how much you owe and how long it will take you to pay everything off. A debt repayment calculator can help you explore how accelerating payments could help you become debt free faster.
3. Your debt-to-income ratio
Your debt-to-income ratio is calculated by adding up your total minimum required monthly debt payments and dividing this number by your monthly income. If your total payment for student loans, car loans and credit card debt is $500 and your income is $2,000, your debt-to-income ratio is $500/$2,000 or 25%.
This number is important because you don’t want your debt-to-income ratio to be too high. A high debt-to-income ratio means so much of your money is going to debts that you won’t have enough to meet other goals.
A high debt-to-income ratio is also a problem if you ever want to get a mortgage. You may be unable to get a loan if your total monthly debt, including your mortgage, property tax and insurance payments exceeds 43% of your income, according to the Consumer Financial Protection Bureau.
Don’t forget, this 43% maximum ratio includes your mortgage — that means the total balance of all of your other debt must be a lot lower so you can add in the mortgage payment and still stay below 43%.
And this 43% is simply the maximum allowable ratio for certain safer loans. You — and mortgage lenders — actually want this number to be as low as possible. “A DTI of 20% or below is considered excellent,” according to Zillow.
4. Your net worth
Your net worth is a measure of your wealth. Calculate it by adding up the value of all the assets you own — like your house, car, furniture and jewelry — and subtracting everything you owe, like mortgage debt and student loans.
While your net worth likely will start out negative when you’re young, with few assets and high college loans, you want your net worth to grow over time. You need your net worth to be positive by the time you’re ready to retire if you want to be financially secure.
You not only should know your net worth, but should also determine if your net worth, based on your age, shows you’re on track to support yourself during retirement. “Multiply your age times your realized pretax annual household income from all sources except inheritances,” Thomas J. Stanley advises in The Millionaire Next Door. “Divide by ten. This, less any inherited wealth, is what your net worth should be.”
5. Your credit score
If your credit is poor, you could pay as much as $250,000 more in interest on mortgage debt, credit card debts and other loans over your lifetime, according to CBS. Wow.
You need to know what your credit score is to find out if you’ll be able to qualify for the best interest rates. You can get free educational scores from Credit Karma or Credit Sesame, and can get your official FICO score free from Discover Credit Scorecard even if you aren’t a Discover customer. There are other ways to get it described here.
“A credit score of 700 or above is generally considered good,” as Experianexplains. “A score of 800 or above on the same range is considered to be excellent. Most credit scores fall between 600 and 750.”
If your number is low, improve your credit score by paying down debt, increasing your credit limit (here’s how) and disputing any mistakes on your credit report.