Remember when you got that first paycheck? You couldn’t wait to see how much cash you received. In fact, you probably had that amount memorized pretty quickly.
It is essential to know exactly how much you will be earning so you can manage your spending in line with your income. But there are other numbers that are important for you to know to avoid making financial mistakes. Here are a few that can help you establish a strong money foundation.
What is your REAL checking account balance?
Too many people make the mistake of determining how much they can spend on a purchase by simply checking today’s balance on your mobile phone or online. There’s a problem with that approach. The balance you see in your account today probably doesn’t count all the expenses you have already authorized against your account.
It’s easy to forget that cable or cell phone payment that you authorized to have automatically deducted from your account on the same day each month. What about that small debit card transaction for a coffee? Now that you’ve finished drinking the coffee, is the memory of the debit card transaction lost as well?
If you don’t keep track of your real balance using an old-fashioned checkbook, spreadsheet, or another method, you’re leaving yourself open to spending more than you think you have in your account. The result of the overspending can be overdraft charges that you don’t want.
What is your available credit card limit?
When you open a credit card, you are approved to use the card to borrow up to a limit. The limit minus the amount you owe for your credit card use is referred as your “available credit.”
Why is it important to know this? Obviously, it tells you how much more you can spend, especially in the event of an emergency. When the unexpected happens, it’s convenient to have credit available to you if you don’t have enough funds in your savings account.
Perhaps more important, though, your available credit amount can affect your credit score. As your balance owed starts to be a more significant percent of your credit limit, your credit score starts to decline. This ratio can be the sole difference between a so-so credit score and an excellent one. And that can impact not only your ability to get credit again; it can also determine how much you will pay for that credit and other things like car insurance.
To maintain an excellent credit score, try to keep your outstanding balance less than 35% of your credit limit. If that ratio starts to creep up, you can consider paying off some of your balance or requesting a limit increase to get the ratio back in line.
What is your cash flow?
Cash flow determines if you have enough cash coming in to cover all the expenses you have going out. This number is vital to track on a monthly basis to determine if you need to make changes to your spending. Not following your income versus expenditures can lead to increasing debt and potential troubles down the road.
What is your net worth trend?
Your net worth is worth knowing if you plan on building wealth over your lifetime. It’s a simple calculation. Let’s stick solely to financial assets for now and skip trying to put a value on possessions.
What are your financial assets?
- How much do you have in your savings account? You might want to leave your checking or debit account balances out of this calculation if you try to minimize the amount you keep in this account.
- Do you have funds in a 401(k)?
- Do you have other investments or savings-type accounts?
Now, subtract the amounts you owe from the financial assets you have? Chances are good this will be a negative balance because we didn’t put a value on things like the car you financed or the things you bought with credit. That’s okay, especially when you’re first starting out in adult life. What you want to look at is the trend.
When you compare to your previous month’s number, are you moving in the right direction? Is the difference between your financial assets and your outstanding debt starting to skew more in favor of the assets? That’s what you want to see. If you can keep a positive trend going, you will begin to see your wealth build over time. If the number is going in the other direction, you then have the first piece of information you need to determine if changes are required.
Know your numbers. You may be thinking, “I wanted a paycheck, but I didn’t know math would be involved!” Don’t feel bad; many people resist thinking about numbers as they relate to money. But just by monitoring these numbers, you’ll be making good progress to a stable financial future.
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