If they mean nothing to you, it's time to get better acquainted with your money
Do you really know your money? You would be surprised how many people don’t know anything about their all-important relationship with their finances. You may think you’re pretty financially savvy, but if you can’t answer these five questions you may need to get better acquainted with your money.
1. Monthly Income
This may seem very basic, but more often than not people can’t answer how much money comes into their home. That means knowing the gross and net income. Almost everyone knows what their salary is, roughly, but when it comes to pre- and post-tax income per month, many people have no clue. Look at your next paystub and take note of both your gross (pretax) and net (post-tax and other deductions) pay. This knowledge really comes in handy when putting together your budget.
2. Monthly Expenses
This one goes hand-in-hand with knowing your monthly income. While knowing how much you have coming in each month is important, it’s equally important to know how much you have going out. Get a grip on your expenses. Take the time to write down everything you spend your money on in a given month. You’d be surprised what expenses you have over and above your rent/mortgage, car, utility and insurance payments. An understanding of your expenses can help you identify areas where you’re overspending and can reveal new ways for you to save. If you want to have a well thought out and effective budget, knowing both your income and expenses is pivotal. Without this knowledge, you won’t know what you can (and can’t) afford and you could easily spend beyond your means.
3. Net Worth
You may think that a ‘net worth’ is only for wealthy people. Not so fast: Net worth, simply put, is the difference between what you own and what you owe. This begins with your bank account, income and expenses. Assets such as investments, cars and real estate all factor in to your net worth as well. Knowing your net worth provides you with a straightforward financial snapshot. If your number is positive, you can give yourself a pat on the back. If it’s negative, you might want to take a closer look at your finances so you can diagnose the problem, and create a plan to get you into the positive.
4. Debt-to-Income Ratio
While your net worth compares all of your assets to what you owe, a debt-to-income ratio shows you specifically how much debt you have compared to how much money you’re making. The first step to figuring this out is to pull up your credit report (to get the most accurate estimate pull it from all three bureaus, in case there is a debt that is reported to one and not the others; also make sure there are no errors in how your debts are reported). Once you’ve checked your free annual credit reports, you can monitor for changes to your credit reports every month by getting a free credit report summary on Credit.com. Tally up your monthly debt payments, and divide them by your gross monthly income (money before taxes and other deductions). As you could have guessed, the lower this number is the better off you’ll be. Ideally you want to keep that number below 35%.
5. Your Invested Income
You may know the number in your savings account, (this is invested income, too, despite the small return) — but do you know if you’re making the most of your money? Ask yourself what your money is doing for you. Is it sitting in the bank to use for a rainy day, or is it working to make you more money? Work with a trusted adviser to come up with a plan. Even if you’re just starting out with your first job, wrangle your money and make it start working for you. If you already have some investments, ask yourself if you know what the money is invested in, not just the old, “oh, it’s in an IRA.” Know who manages it, what you earn, what the money is invested in and what kind of returns you get. The younger you are, the more freedom you have to make that young money work hard to earn you the most possible future money.
Finally, your money should be in line with your future goals. Know what those goals are and the compatibility with your money. Saving money alone is not enough when it comes to having good financial health. You have to make sure you’re paying attention to what amount of your savings is for what, and whether you’re not on track for the big things.
When it comes to managing your money, it’s easy to get overwhelmed if you don’t really know your money. Between knowing all the terms and numbers, you can quickly lose track and get discouraged. However, if you take the time get to know your money and how it impacts your life, it’ll be easy to see that financial health comes down to being in the know. So the next time you want to have a close relationship with your money situation, take a deep breath, and jump in as if you were interviewing your money for a job … to work for you.
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This article originally appeared at Credit.com.