You probably know how much your monthly mortgage payment and cable bill are, but do you know your credit score and net worth? Just as blood pressure and cholesterol are valuable measures of your physical well-being, we’ve come up with seven numbers you need to track the state of your financial health.
They measure everything from how quickly you’re accumulating wealth to paying down debt and building the kind of reputation that makes borrowing money a breeze. We’ll show you not only where to find these numbers, or how to calculate them, but provide simple guidelines that will help you judge your progress and financial success.
Are you stashing more money in your retirement plans than most Americans? Or carrying bigger balances on your credit cards? Or building more equity in your home? Once you’re done, you’ll have a much better understanding of how well you’re managing your money — and what you need to do better.
7 Measurements of Personal Financial Success
Measurement #1: Emergency fund
Everyone should have some cash stashed in CDs or a savings account that can be quickly and easily reached to:
- Pay routine bills if their income is disrupted by a layoff, illness or injury, or
- Cope with a big, unusual expense — a wrecked car or storm-damaged house, for example — that your regular income can’t possibly cover.
How much do you need?
Six months’ worth of expenses is a common recommendation.
Let’s say you spend $2,500 per month on everything from car payments and groceries to mortgage or rent. Then you need an emergency fund of $15,000.
Having such a cushion shows that you’re no longer living paycheck to paycheck and have taken the first step down the road to financial security.
Measurement #2: Retirement savings balance
This is the total amount in your tax-deferred retirement plans — typically a 401(k) plan at work and individual retirement accounts.
Many Americans are falling woefully short in this measure. According to Fidelity Investments, the largest defined contribution record-keeper, the median balance in 401(k) accounts is just $24,500.
How can you tell if you’re on track?
A good retirement saving rule of thumb is to have saved twice your annual income by the time you’re 40, four times by the time you’re 50 and eight times by the time you turn 67. So, if you’re earning $40,000 per year at age 40, you should have about $80,000 in your 401(k) and IRAs.
Measurement #3: Retirement savings rate
To ensure you’ll have enough for a secure and happy retirement, financial experts say you should be saving at least 10% of your gross (that’s pretax) income — and probably more like 12% to 15%.
If you can’t set aside that much, contribute what you can with the goal of increasing that amount by 1% every six months.
Measurement #4: Credit card debt
When it comes to getting ahead in life, credit card debt is a terrible anchor.
Why? Because credit cards charge the highest interest rates of any type of consumer debt — typically about 18% to 22% — and allow borrowers to string repayments out for so long that it greatly inflates the cost of everything they buy.
Way too much money that families should be saving and investing in themselves and their futures winds up in the pocket of credit card companies.
According to a Gallup survey, 3 of every 10 Americans don’t own any credit cards, and half of those who do use them say they pay off the balance every month.
But Federal Reserve data show households that carry credit card debt owe a substantial amount — an average of around $6,741.
If that’s you, there’s only one acceptable goal — pay it off as quickly as possible.
Measurement 5. Credit score
The three major credit-reporting agencies — Experian, TransUnion and Equifax — collect all sorts of data about your borrowing and bill-paying habits.
The information from those reports is then used in complex and secret formulas to generate your credit score, which is supposedly a measure of your creditworthiness.
The oldest and most widely used formula was created by Fair Isaac Inc. and results in what’s known as the FICO credit score. FICO scores range from 300 to 850.
You can obtain free copies of your credit reports at annualcreditreport.com. Take advantage of this to check for mistakes — and errors are depressingly common.
While getting a free credit score has never been a right, the Consumer Financial Protection Bureau has been pushing credit cards to provide them to their customers.
Many have begun to do that, either through special websites or by printing scores right on monthly statements.
Another option is to use FICO’s free credit score estimator.
Measurement #6: Home equity
Real estate is a major source of wealth, and your stake is simple to calculate.
Just take the current market value of your home, and subtract the outstanding balance on all mortgages.
Let’s say your home is worth $200,000, and you owe $150,000 on it. You have $50,000, or 25% equity, in your home.
There are no mortgages on about one-third of all homes, so their owners hold 100% of the equity.
CoreLogic, a California-based research firm, estimates that homeowners hold just over 40% of the equity in those properties that are mortgaged.
Measurement #7: Net worth
We saved the best for last — the most complete measure of how rich you are.
In the simplest of terms, net worth is your assets minus your liabilities. It’s what you would have left if you sold everything you owned and paid your debts.
Our net worth calculator can help you do the calculations and make sure you don’t forget anything.
So how much should you have to feel as if your financial life is on track?
The Federal Reserve’s most recent Survey of Consumer Finances found that the median family net worth (half of all households have more, half have less) was:
- Ages 45 to 54: $124,200
- Ages 55 to 64: $187,300
- Ages 65 to 74: $224,100
The Wealthometer: USA, created by an economics professor at Harvard University, also shows where you stand financially with respect to other Americans.