Amanda's Note: This was provided by an online contact.
If you’re working to improve your financial life, grow your wealth, or get to a place where you’re not struggling to make ends meet, it’s important to understand the metrics by which your finances are best understood. When you’re looking at your bank account or your bills, there are a lot of numbers flying around. While the following list is by no means complete, these are three of the most important numbers to pay attention to. When they’re right, chances are that your finances are headed in the right direction.
- Credit Score. A credit score is a measure of the quality of your spending and debt habits, basically. Credit Reporting Agencies take a look at how you pay your bills, how much credit you have on your various cards and accounts, and other records of the ways in which you use your money. When you go to take out a loan or apply for a credit card, the company you are making the request to will look at your credit score. If it’s high, they’ll likely grant your loan request and won’t charge you tons of interest. If your credit score is low, you may be denied a loan, or charged very high interest if your request is granted. This Discover Personal Loan Review (Updated for 2017) will help you understand that process a little better. In general, if your credit score is in the 700-800+ range, you’re doing really well. If it’s lower, you should think about focusing on getting it higher.
- Debt Stats: Your debt can be understood lots of different ways, but a flat figure can still give you some important information. The most important observation you can make is your debt when compared to your salary or other income. If your debt is many times your income, you are probably have a lot of trouble keeping up with payments. If your income is close or even higher than your debt, you are probably feeling OK about it. It’s a good idea to reduce your high interest debt (Credit cards, etc.), no matter how much you have. If your debt is the result of lower interest lending sources, like a mortgage or student loan, then you can reasonably support more of it.
- Savings/Emergency. Saving in any form is an important thing to have for adults, but an emergency fund may be the real measure of relative financial security. There is no perfect number for an emergency fund, but it should be enough to cover your expenses, and those of your family, for three to six months in the event that you lost your job or otherwise found it impossible to bring in adequate income. Emergency funds mean peace of mind and security.
If you have low/manageable debt, an emergency fund, and a good credit score, chances are that your financial situation is in good shape. Keep it up and you’ll be building a better future for yourself. Once you get these numbers in order, they’re relatively easy to maintain. Keep up the good work!