- Credit Score
Ah, credit score. Something you may not want to know – but most definitely should. Two of the most important credit scores are your FICO score and VantageScore, partly because they are most widely referred to. Your credit score is what lenders use to determine the risk of loaning you money. This includes credit card companies, auto dealers, mortgage bankers, and even some landlords and insurance companies.1
Consistently paying your bills when they are due, in full, and keeping your credit card balance(s) low are great ways to improve your credit score.
- Debt-to-Income Ratio
` Your debt-to-income ratio is a simple ratio that measures how much of your money has to go towards making debt payments.2 This number can be easily calculated by adding up the payments you owe (monthly car payment, credit card minimum payment, housing costs, etc.) then dividing it by your monthly income. This number is important because it allows lenders to quantify your ability to manage your monthly payments and repay the money you have borrowed.3
- Monthly Expenses
Your monthly expenses are vital to know because not only can it help you achieve financial independence, but it can help you not go into debt – or even get out of debt. Understanding your spending rates can help you to determine how much money you should be stashing away in an emergency fund. To be completely safe, some people suggest that you should have three to five months worth of living expenses saved up in the unfortunate event that a crisis occurs. It’s always better to be safe than sorry!
- Savings Rate
Probably the most important step to achieving financial success is actually saving for it. Saving around 15% of your income (more or less) for a comfortable retirement is not the only thing you should be saving for. Consider your other big purchases such as a home down payment, paying for a car in cash, and other financial goals and milestones.
- Net Worth
Your net worth represents the wealth that you have, and it’s fairly easy to determine and understand. For example, add up the value of your house, your car, your personal property and savings and subtract your debts, such as mortgage loans, etc. This will either be a positive or negative number depending on your assets and debts.4
The more assets and less liabilities you have, your net worth should be positive. If you have debts and few assets, your net worth will most likely be negative. For most people who are just starting out – i.e. recent college grads – with car loans and student loans, don’t stress too much. In that case, it’s normal to have a negative net worth. It just means you have to work a little bit harder to get to a positive net worth. Tracking your saving and spending rates can really help you get out of the negative net worth red zone.
Sources
1https://www.investopedia.com/articles/pf/10/credit-score-factors.asp
