Four Financial Numbers You Really Need To Know
When tracking your own financial progress from year to year, there are four financial numbers that you focus on in particular. They’re easy to calculate using information that’s readily available (mostly from your T4 slip and bank/investment statements) and it takes very little time:Your Net Worth
To calculate your net worth you take the value of everything you own and subtract the value of everything you owe. (Assets – Liabilities). This simple calculation is a great benchmark to track from year to year because it clearly shows you if you’re making progress in building wealth and creating financial security.Your Net Income
Thanks to taxes and other deductions there’s often a dramatic difference between our gross income and the amount we actually take home each pay cheque. Too often we focus on the gross amount rather than the net and this can lead to an over inflated view of how much we actually have available to spend. Basing your lifestyle on the $75,000 you make gross rather than the $50,000-$55,000 you take home (depending on which province you live in and your benefit premiums) gives you a distorted view of your financial situation and may leave you wondering where on earth all your money goes. Focusing on your net income figure allows you to make real plans for your money and helps you track whether your financial situation is improving year by year.Your Savings Rate
Taking the amount that you save each year and dividing it by your gross income gives you your savings rate. The savings rate in Canada has been less than 5% for a long time which is a big problem when you consider that experts have long recommended saving 10% of our gross income for retirement. It’s an even bigger problem when you factor in saving for other goals. Simply put, if you’re not saving then you’re not building a “buffer zone” to protect yourself against an unexpected drop in income or increase in interest rates. This makes you vulnerable. Putting a spotlight on your savings rate and doing what you can to maintain or increase it each year will help you stay out of debt and build a solid financial foundation.Your Credit Score
Your credit score is a reflection of how much debt you are currently carrying, how much you have available and your payment history. Creditors use your score as an indicator of whether you can handle new debts and how likely you are to default on loans. A low credit score makes it hard to access credit and can mean that you pay higher interest rates than someone with a higher score. Keeping track of your credit score and monitoring the information in your credit report helps you stay on top of your finances and detect any errors or any issues relating to identity theft. You can order a free copy of your credit report once a year by mail from Equifax and Trans Union. Equifax also allows you to access your credit score online for an additional charge.
Taking a look at each of these financial numbers at the start of each year, gives you a candid snapshot of your personal financial situation and allows you to identify any areas that you especially need to focus on over the next 12 months. It also lets you to see your progress from year to year which can be a great motivator.