Welcome to Day 1 of our 30-Day Easy Money Makeover! Every day in April, we're bringing you strategies to help you improve, and feel more confident about, your money situation. Follow along and see the rest of the calendar here .
To figure out the best strategies for improving your finances, it helps to first determine where you are, money-wise.
As a baseline, running calculations like your net worth and savings ratio can show you where you’re already doing well and which areas could stand to improve. And over time, as you check back in and reevaluate, you can put hard numbers to how well strategies have worked (or haven’t, as the case may be). That helps you figure out your next steps.
Here are three numbers experts recommend keeping tabs on, to measure your financial health and progress toward your goals.
Net worth = Assets – debts
Say "net worth," and most of us think of the Richard Bransons and Warren Buffetts of the world. Well, everybody has a net worth, and it's a number that helps illustrate your financial well-being. That's why the first thing most financial advisors do when meeting a new client is create a net worth statement. You can easily calculate your own:
"The net worth statement outlines all the assets owned and all the liabilities owed," says Robert R. Johnson, a chartered financial analyst and a professor of finance at Creighton University in Omaha. "An individual's net worth is simply calculated as the difference between total assets and total liabilities."
Keeping tabs on that number over time shows the cumulative effect of small changes, like steadily paying down your mortgage and investing in your 401(k).
If your net worth comes out to be a negative number, that's not a reason to panic.
"Most individuals' net worths are negative as they leave college with student loan debt and have little, if anything, saved," Johnson said. "As their careers progress and they pay down debt and accumulate assets…net worth should rise."
Debt-to-income ratio = (monthly debt payments / gross monthly income) x 100
Your debt-to-income ratio is important when you're looking to take out a mortgage or other loan. Banks use this percentage figure to help decide whether to loan you money, and how much, says Taylor Jessee, a certified financial planner and a family wealth manager at Taylor Hoffman Wealth Management in Richmond, Virginia. It can also be a good way to track for yourself whether your debt is getting unmanageable.
"Generally, the lower this number is, the better," he says. For a big loan like a mortgage, lenders generally want to see a debt-to-income ratio of 36 percent or less.
How can you figure out yours? Add up your monthly debt payments, including housing, student and auto loans, and credit card debt. Divide that number by your gross monthly income—that is, how much you make before taxes and any pre-tax expenses like your 401(k) contributions or health care premiums are taken out. Multiply the result by 100 to get the percentage of your income that's going toward debt.
Savings rate = (monthly savings / gross monthly income) x 100
You may have heard of the 50/30/20 rule, which recommends you earmark half of your income for basic living expenses, 30 percent for fun stuff like shopping and travel, and 20 percent for long-term goals like paying back student loans or building retirement funds.
Your savings rate refers to that last bucket, the percentage of income that you put aside. "A personal savings rate of 10 percent should be the minimum," says Johnson.
To come up with your number, add up all the money you actively save each month, along with any outside contributions (like the company match on your workplace retirement account) and any payments you've made toward the balance on debts. (Interest doesn't count.) Divide that by your gross monthly income. Multiply the result by 100 to get the percentage of your income that's going toward savings.
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