Marc A. Hebert's Money Sense: When it comes to finances, it's good to know your numbersBy MARC A. HEBERT
August 04. 2017 9:00PM
Sometimes a number can tell you a lot of information. Just as knowing your blood pressure is one key to your health, there are numbers that are key to your finances. Here are a few that you should probably know.
The first is the rate that you are contributing to your retirement plans. Start by reviewing how much money is going into the plan your employer provides. This is a fairly automatic way to save and you can lose sight of just what you are contributing over time.
As a result, there may be a disconnect between what you need to save and what you actually are saving. It is a good idea to check your contribution rate periodically just to be sure that you are on track. Consider increasing it when you receive a raise and be certain that you at least contribute enough to take full advantage of your employer match.
Another good number to know is your credit score. This number indicates the ability to manage and borrow responsibly. Late payments, missed payments, and defaults will affect the score. This is a tool often used by lenders to evaluate your creditworthiness. Whether it is a mortgage, a car loan, or a credit card, having a good credit score can make for good terms and interest rates. Your credit score may even be the difference as to whether or not you get approved for a loan at all.
The most common credit score is a FICO Score. This is a three digit number that will range from 300 to 850. It is calculated based on a mathematical formula - the higher the score, the better.
The three major credit reporting agencies (Equifax, Experian, and TransUnion) calculate the FICO score differently. You might want to retrieve the score from each one. But beware, fees apply. In conjunction with this, you might want to get a copy of your credit report. You are entitled to a free one from each reporting agency every 12 months. See www.annualcreditreport.com for the details. Check the credit report for accuracy and resolve any issues.
Do you know your net worth? This important number is a snapshot of where you stand financially. It represents all your assets less all your liabilities. A net worth is essentially the value of what you own minus what you owe.
It can be used as a baseline of your financial progress. Over the years, as you save and invest more money, the assets will grow. As you pay down debt, your liabilities will decrease. The combination of these two factors will increase your net worth over time.
If your net worth is not increasing, then it might be a good idea to find out why. Perhaps your investment strategy needs rethinking? Maybe you could save more? Are you using your credit cards a bit too much? A good handle on your net worth gives you a window into your finances.
The final helpful number is your debt-to-income ratio. As the description indicates, it is the balance you have between debt and income. This is another number your lenders use to decide whether to offer you credit or not. One that is too high may indicate you are reaching a point where you can't pay off your debt.
To calculate this number, add up all of your monthly recurring debt obligations and divide that by your gross monthly income. Debt includes mortgage, home equity loans, student loans, as well as credit card payments. Generally, mortgage lenders require a ratio of 36 percent or less for conventional mortgages and 43 percent or less for FHA mortgages. A higher debt-to-income ratio can be worked on. You may be able to pay off low-balance debt or avoid new debt, for example. As you can see, knowing your numbers can lead to a better financial outcome.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at firstname.lastname@example.org. Your question and his response might appear in a future column.