Negosentro.com | 5 Areas to Evaluate on Your Financial Report Card | In school, report cards showed us a snapshot of our academic performance broken down by subject. Rather than having to look at dozens or hundreds of individual assignments to ascertain where we stood, we could look at our letter grades at a glance.
Of course, in the “real world” there’s nobody standing by to hand us report cards in subjects like money management. It’s up to each individual to keep track of their own financial standing.
Creating a financial report card of sorts — sometimes referred to as a personal financial statement — can help us keep an eye on how we’re doing without having to include every single transaction. It’s a general way to get a feel for our financial stability as well as an excellent tool for helping us set financial goals. The basic idea here is to keep track of assets and liabilities in one convenient location.
Here are five “subjects” worth evaluating on your financial report card.
Net Worth
The broadest way to compare your assets (what you own) against your liabilities (what you owe) is to calculate your net worth. This leaves you with a single figure, which can be positive or negative depending on your situation.
On the asset side, you’ll want to include any cash you have in the bank, investments and property like houses and vehicles. Liabilities include any outstanding debts you have. Having totaled these, subtract what you owe from what you own.
It’s helpful to track this number periodically over time so you can observe the trend. Ideally, you’ll see this number grow over time, as you increase your holdings and work down your debts.
Debt
Although your debts do figure into your net worth calculations, it’s also important to examine them on their own. Only then can you formulate a realistic plan for paying them down over time.
It also helps to group debts by whether they add long-term value (“good”) or whether they simply cover living expenses without improving your finances (“bad”). Mortgages and student loans typically fall under the former, while credit cards exemplify the latter.
How you handle your debts depends on their type and amount, as well as how much you can budget toward debt each month. Borrowers with a couple hundred or thousands of dollars may decide to come up with their own targeted repayment plan — systematically tackling balances by either size or interest rate. Borrowers with more than $7,500 in debt who are starting to fall behind on payments may decide to meet with a credit counselor or try a debt relief program like one under the Freedom Financial Network.
Credit Score/History
Your credit score provides a numeric rating based on your credit history. While it’s important to keep tabs on your score — as it can alert you to the possibility of an error, missed payment or other change — it’s equally important to periodically request your full credit history.
Americans are entitled to one free report from each of the three major credit reporting bureaus every year. Whether you request them simultaneously or every four months is up to you. You’ll want to scan these reports for errors and work to rectify missed payments.
Emergency Fund
Another category on a thorough financial report card is emergency savings. Most experts recommend stashing away at least enough savings to cover three months of living expenses without income; many recommend aiming for six or 12 months’ worth.
Retirement
How much you need for retirement will depend on the lifestyle you wish to live, but a decent starting point is aiming to have 70 to 90 percent of your pre-retirement income for each year of your post career life. Try inputting different possibilities into a retirement calculator to set your own personalized goal against which you can “grade” your “report card.”
School may be over, but you can evaluate your finances by category using a similar report card approach. Doing this a couple times a year will help you understand where you’re passing and where you could use some adjustments to get back on track.
