3 Financial Numbers To Track
Image from Envato Elements
When I first started learning about money, it was overwhelming. People throw all kinds of terms and statistics at you, but now when I’m older and I’m offering advice to my younger family members, I prioritize telling them about 3 key financial numbers they should concentrate on. Let me share them with you.
Net Worth
This is the overall snapshot of your financial health. It’s the difference between your assets (all the things you own) and your liabilities (what you owe).
This is often considered the most crucial financial number to track because it provides a clear picture of your financial health.
To calculate your net worth, you list out all your assets, including bank account balances, investment accounts, real property value, anything else that holds value, then list all your liabilities, such as loans, credit card debts, and mortgages. When you subtract total liabilities from your total assets, this will give you your net worth.
You want this number to be positive, but many of us first starting out (including myself) start with a negative number. Don’t despair; you can improve it. It will require increasing your assets, decreasing your liabilities, or more realistically, a combination of both.
Paying off debts as quickly as possible and saving and investing aggressively would see your net worth increasing over time. Speaking of saving and investing aggressively, let’s look at the next financial number to track.
Savings Rate
In my opinion, this is the number 1 predictor of your ability to become wealthy.
This number represents the percentage of your income that you save and invest. It's a direct measure of your ability to set aside money for long-term goals, emergencies, or retirement.
A higher savings rate accelerates your path to financial independence, allowing you greater flexibility and peace of mind.
A healthy savings rate not only helps in building a financial cushion but also instills discipline in managing money effectively.
Now, experts often suggest aiming for a savings rate of at least 20%, but the right target for you will depend on your financial goals, age, and lifestyle.
Here’s how you calculate it. You want to divide the amount of money saved and invested in a given period by your total net income for the same period, then multiply that number by 100 to get a percentage. For example, if you save $500 and invest another $500 out of a monthly net income of $5,000, your savings rate for that month would be 20%.
So how do we increase our savings rate? We’ve got to increase or income and decrease our expenses. One of the biggest ways to affect this number is by automating your savings. This ensures a consistent portion of your money is set aside to either savings or investments.
Emergency Fund Balance
Image from Envato Elements
An emergency fund is a financial safety net designed to cover unexpected expenses, such as medical emergencies, sudden job loss, or urgent home repairs.
If there is one thing I could go back and tell my younger self, it would be to prioritize this more. Just the sheer relief in anxiety knowing I had enough money stashed away is inexplicable.
Financial experts often recommend an emergency fund size of three to six months' worth of living expenses, though the exact amount can vary based on job stability, income sources, and personal circumstances.
The key point here is that your emergency fund balance should increase with changes in your life. If you buy a house, have children, or are now taking care of your parents, your emergency fund balance should increase to cover these additional potential financial strains.
Prioritize contributing to this fund until you reach your goal, then maintain it as part of your overall financial plan.
Look, there are going to be a million and one financial concepts you’ll hear and learn about, but these 3 are some of the most important and if you track them, many other concepts will simply fall into place.
Want to buy a house? Well you’ll need a lower DTI or debt-to-income ratio, but if your savings rate is high and you have a solid emergency fund, then that, typically, is already low.
You’ll also want a solid credit score. Once again, if you’re tracking your net worth, then you’re most likely already prioritizing lowering your liabilities and increasing your assets. This would build habits like paying your bills off on time and not carrying balances forward on your credit cards. Both of those, will put you in a great position for a higher credit score.
Regular monitoring of these numbers will help you make good financial decisions, decrease anxiety and stress related to money, and put you on the path to Financial Freedom.
