It would be great if all of us had a barometer to keep a check on our personal finances. But we don’t! So it becomes important to understand some key concepts that will help you assess your financial situation. This will give you insights into how stable your finances are and what you can do to improve the situation. Here are a few things you need to know:
Net worth, which is basically your net financial position, is the total of your assets minus your liabilities. Your net worth tells you that if you pay off all your debts, then how much money you’ll be left with. Knowing this number is critical so that you don’t get stuck into a situation where your debt burden will stay with you for the rest of your life.
You can use an online calculator to find out what your current net worth is. A small or negative net worth is a clear indicator that you could be in a long-term problem. While a large net worth number shows that you are living well within your means and you can afford to take some financial risks to seek higher returns.
Debt to Income Ratio
This is the percentage of your monthly income that is used to pay debts like mortgage, personal loans, credit card debts etc. Try to minimize your debt to income ratio so that you are not in constant stress to make ends meet month after month. A low ratio will help you deal with any unforeseen financial problems. Moreover, if you are close to retirement, then you need to save 20% to 25% of your income to build up your retirement fund. This is not easy to achieve if you have a high debt to income ratio.
Your monthly budget is a financial plan about your income and expenses for a particular month. It highlights exactly how much your monthly income is and what are its sources. On the opposite side, it shows where you are spending your money. This allows you to organize your finances and make some changes to curb excessive spending. You can use some online services to track your monthly expenditure and create an accurate budget.
If you find it difficult to keep track of your financial situation, you can also get expert advice from a financial planner. You would end up saving money and needless worry if you choose a good planner to look after your finances.