I think sometimes we are too disconnected from our real financial picture or maybe even down right scared to face the music and actually look at where we are financially.
I’ve been there.
You know the moment you get the mail, do a Hail Mary and you pray your visa statement isn’t as bad as you think. Then you kindly tell the police officer who came knocking at your door to investigate the screams that the neighbour heard and say it was just the movie Scream playing on TV really loud and not the shrills of you opening your visa statement…..
(whatever…. like that’s never happened to you before…pffft…)
Time for the fun talk on money measurements!
These are 5 Money Measurements that you just need to know. Period. (*#5 is the money measurement I invented and for obvious reasons is my favorite! OK – so it’s not like rocket science, but I like to see how much my net worth is growing each month….you can skip right to it if you want 😉 – the other ones were probably invented by smarty-pants-Harvard-types a billion years ago and although your eyes may glaze over and think about tonight’s season premier of Grey’s Anatomy, these are still great measuring tools you need to know.)
Also, I have tried to make this less technical and I even put what the goal should be; unlike those math textbooks that never gave you the answer in the back – boooo! Or like when you learn a new sport and you don’t know if the object of the game is to score high or low (like, I still think in golf the highest number should win.) So I wrote what GOAL you are aiming for right below – you can thank me with starbucks (grande skinny vanilla latte, please)!
1) Debt Ratio = All Debt / Annual Gross Income
(GOAL: 0 or a LOW NUMBER)
This takes your total gross debt divided by your total gross income (I know there is no such thing as ‘gross debt’, but it sounded gross so I put it in there – not to be confused with your gross income, which is gross because you realize it’s what you make before tax).
So, if you earn $80,000 in gross income, and service a total of $300,000 in debt your ratio would be 3.75 There is no right or wrong number here, just know the lower you can get your number, the better it is for you. It means you will have more money every month to save for things like earlier retirement, future education, business expansion, more travel or a big party. Either way, getting your debt load down will free up money and give you more options.
2) Monthly Free Cash Flow = Monthly Take Home Dollars – Monthly Expenses
(GOAL: Highest number possible)
This gives you your disposable income that you can use. The point of cash flow is to see where money is flowing to in different areas and when analyzed by a financial coach, you should be able to find ways to increase your cash flow. Cash flow is the name of the game, because if you can consolidate debt or free up more money to save or pay off your debts in a fast time, then you will reach your goals faster. So, in a nutshell, taking time to do these money measurements will hopefully get you to your goals faster.
3) Net worth = Assets – Liabilities
(GOAL: Highest Number Possible)
Add up all your assets, like your house, your investment accounts, everything of value or that will hold it’s value (your garden gnome collection doesn’t count!) and then subtract it from what you owe and VOILA – you have your net worth. Just please don’t compare to your net worth to your neighbor’s and never get that tied up with your self worth – people have a tendency to do that. 🙂 (You are worth a billion gatrillion times more valuable!)
4) Credit Score or FICO Score
(GOAL: Highest Number Possible – over 680 is good)
There are only 2 major credit reporting agencies in Canada. You can contact Equifax or Transunion. You are allowed to get a FREE copy legally in the mail (they make this hard to find online cause they want your $), but for under $30 you can get instant access online to it. It’s a good idea to find out if you haven’t. Plus, it’s smart to make sure there is no fraudulent activity or that they have incorrect information on it, which can negatively effect if you ever need to use credit in the future. I will write a detailed blog about credit in a few weeks and how it works, because I still think it’s overlooked and most people don’t know how it’s actually calculated.
*5) Up-Down Indicator (now called the Net Worth Maximizer!)
(GOAL: Highest Number Possible )
Well, possibly the best financial tool ever invented by yours truly. You can download my Up/Down Simple Planning Page by signing up below! Or if you are really nice, I’ll email it to you. What the Up-Down Simple Planning Page does is calculate in simple terms how fast your net worth is growing each month by adding and subtracting some key personal financial numbers. I even made a 5-minute audio to accompany it for further explanation.
I created this for one of my best friends who came to me and said that she didn’t ‘feel’ like they were getting ahead financially at all, and even though I knew they were in my head, I wanted to show her that she was doing better financially than she thought. I think half of the battle is that we have these crazy notions that we are ‘bad’ financially or that our money is no good or just all that crazy money talk floating around between our ears. The bottom line is this: things probably aren’t as bad as they seem.
Final Note: You will need to pick a day, and then repeat this exercise in a year so you can get your year over year results and then get a better picture of how you are improving.
“What gets measured gets improved.” – Peter Drucker