Trying to take your financial temperature? It’s not just a matter of how much money you have in the bank. There could be millions of dollars there and you could still be off-track if you’re investing it unwisely.
Your financial health comes down to a series of ratios. Here’s where you should start:
1. Credit Score
Contrary to big financial numbers that make most people stick their heads in the sand, many obsess about their credit scores, says Greg McBride, chief financial analyst for Bankrate.com. This is especially true for those with low scores who are trying to figure out how to raise them.
Indeed, your FICO credit score—a ratio determined independently by three credit bureaus and based primarily on your track record of paying bills on time – is about far more than just being approved for loans.
“It has tentacles into different areas of your life,” McBride says, with the potential to affect your insurance rates, job offers, and whether or not you are approved for apartment rentals.
Your credit score is also a gauge of your general financial health. “It’s a measuring stick that tells you where you stand now, and over time, you want to be in a position to make sure that score is increasing, particularly if you are starting from a low point,” McBride says.
You can get a free annual credit report from each of the credit bureaus via annualcreditreport.com, but it won’t include your actual FICO score, which ranges from 300 to 850. For that, your best bet is a free estimate, which you can get from a site like Bankrate, or it will come with your monthly credit card statement if you have a Discover card. Other credit card companies also offer free credit scores, so be sure to ask.
Otherwise, you can pay TransUnion, Equifax, or Experian directly for the information, but it might not be exactly the same number that they provide lenders who ask for your information, according to the Consumer Financial Protection Bureau.
2. Retirement Savings Rate
There is no single, correct dollar amount to put aside for retirement, which is why most projections rely on percentages. The most important one is how much of your salary you should put aside for retirement, which experts peg at 15%.
By contrast, if you just look at the end number that an online calculator may spit out, “the mountain seems way too big,” says Scott Halliwell, a personal finance expert for USAA.
You might see that you need to save $500 a month to meet projections, but you may only be able to save $100. “That’s okay,” Halliwell says. “At least you know what you have to shoot for.”
The important thing is getting in the habit of saving, says McBride. “Particularly for younger people, the number they need to shoot for is 15%. And that’s a destination, not a starting point. If you’re at six or seven, that’s great, work your way up to 10%,” he says.
Keep in mind that with a company match, you could even sock away as much as 21% of your salary each year.
3. Emergency Fund
The number you need to know: How many months could you survive on your savings?
“A lot of folks don’t have anything,” says Halliwell. “We live in the here and now. But if they knew that number, they’d be more thoughtful.”
The ideal amount for a single person is a cash cushion of six months. For a family with kids, you need a year’s worth of emergency savings, says Alexa von Tobel, founder and chief executive of LearnVest.com, a financial information and advisory company. But few of us have that, with 76% of the country living paycheck to paycheck, von Tobel says.
Indeed, you could get into a lot of financial trouble without an emergency stash. Many people end up leaning on high-interest credit cards for funds, paying dearly for not having saved, says Vera Gibbons, a personal finance consultant for Mint.com. Others dip into retirement money. “You need to know how much you can conceivably stand to lose even if you take out $5,000,” Gibbons says.
Here’s why you should not consider your retirement savings as part of your emergency stash: According to benefits consultant Aon Hewitt, if you were 25 when you took $5,000 out of an IRA, you would only have $3,500 after taxes and penalties, which could have otherwise grown to about $75,000 after decades in the account.
The key is to achieve an overall balance in your finances, with about half your income going toward fixed expenses like rent and utilities, 20% for financial goals like savings, and 30% for day-to-day expenses like groceries and gas, Gibbons advises.
4. Net Worth
You don’t need to wrestle with a calculator to figure this one out. “It’s pretty simple—just assets minus liabilities,” says Bankrate’s McBride.
People tend to think of this number as their “wealth,” says LearnVest’s von Tobel, but it’s not really about how much you have at any given point. Rather, people should use net worth as a starting point to see how they are doing down the road.