Financial metrics you should know

Advice offered by Marc Hebert, a founder of The Harbor Group Inc. The company is a registered investment advisor. If you have any questions about finance or if you’d like to suggest a future topic, email webstaff@wmur.com.Sometimes a number can tell you a lot of information. Just as knowing your blood pressure is one key to your health, there are numbers that are key to your finances. Here are a few that you should probably know.The first is the rate you are contributing to your retirement plans. Start by reviewing how much is going into the plan your employer provides. This is a fairly automatic way to save and you can lose sight of what you are contributing. As a result, you may have a disconnect between what you need to save and what you actually are. It is a good idea to check your contribution rate periodically just to be sure you are on track. Consider increasing it when you receive a raise and contributing enough to take full advantage of the employer match. Another good number to know is your credit score. This number indicates the ability to manage and borrow responsibly. Late payments, missed payments, and defaults will affect the score. This is a tool often used by lenders to evaluate your creditworthiness. Whether it is a mortgage, car loan, or credit card, having a good credit score positions you to receive good terms and interest rates. A strong credit score may even be the difference as to whether or not you get a loan at all. The most common credit score is a FICO Score. This is a three digit number that will range from 300 to 850. It is calculated based on a mathematical formula. The higher your score, the better. The three major credit reporting agencies (Equifax, Experian, and TransUnion) calculate the FICO score differently. You might want to get the score from each – be aware that fees apply. In conjunction with this, you might want to get a copy of your credit report. You are entitled to a free one from each reporting agency every 12 months. See www.annualcreditreport.com for the details. Check the credit report for accuracy and resolve any differences. Do you know your net worth? This important number is a snapshot of where you stand financially. It is all your assets less all your liabilities. Essentially, net worth is the value of what you own minus what you owe. It can be used as a baseline of your financial progress. Over the years, as you save more money, your assets will grow. As you pay down debt, your liabilities will decrease. The combination of these two things will increase your net worth over time. If your net worth isn’t increasing, it might be a good idea to see why. Could your investment strategy need rethinking? Could you save more? Are you using your credit cards a bit too much? A good handle on your net worth gives you a window into your finances. The final helpful number is your debt-to-income ratio. As the description indicates, it is the balance you have between debt and income. This is another number your lenders use to decide whether to offer you credit or not. One that is too high may mean you are reaching a point where you can’t pay off your debt. To calculate this number, add up all of your monthly recurring debt obligations and divide that by your gross monthly income. Debt includes mortgage, auto loans, home equity loans, student loans, as well as credit card payments. Generally, mortgage lenders require a ratio of 36% or less for conventional mortgages and 43% or less for FHA mortgages. A higher debt-to-income ratio can be worked on. You may be able to pay off low-balance debt or avoid new debt, for example.

Advice offered by Marc Hebert, a founder of The Harbor Group Inc. The company is a registered investment advisor. If you have any questions about finance or if you’d like to suggest a future topic, email webstaff@wmur.com.

Sometimes a number can tell you a lot of information. Just as knowing your blood pressure is one key to your health, there are numbers that are key to your finances. Here are a few that you should probably know.

The first is the rate you are contributing to your retirement plans. Start by reviewing how much is going into the plan your employer provides. This is a fairly automatic way to save and you can lose sight of what you are contributing. As a result, you may have a disconnect between what you need to save and what you actually are. It is a good idea to check your contribution rate periodically just to be sure you are on track. Consider increasing it when you receive a raise and contributing enough to take full advantage of the employer match.

Another good number to know is your credit score. This number indicates the ability to manage and borrow responsibly. Late payments, missed payments, and defaults will affect the score. This is a tool often used by lenders to evaluate your creditworthiness. Whether it is a mortgage, car loan, or credit card, having a good credit score positions you to receive good terms and interest rates. A strong credit score may even be the difference as to whether or not you get a loan at all.

The most common credit score is a FICO Score. This is a three digit number that will range from 300 to 850. It is calculated based on a mathematical formula. The higher your score, the better. The three major credit reporting agencies (Equifax, Experian, and TransUnion) calculate the FICO score differently. You might want to get the score from each – be aware that fees apply. In conjunction with this, you might want to get a copy of your credit report. You are entitled to a free one from each reporting agency every 12 months. See www.annualcreditreport.com for the details. Check the credit report for accuracy and resolve any differences.

Do you know your net worth? This important number is a snapshot of where you stand financially. It is all your assets less all your liabilities. Essentially, net worth is the value of what you own minus what you owe. It can be used as a baseline of your financial progress. Over the years, as you save more money, your assets will grow. As you pay down debt, your liabilities will decrease. The combination of these two things will increase your net worth over time.

If your net worth isn’t increasing, it might be a good idea to see why. Could your investment strategy need rethinking? Could you save more? Are you using your credit cards a bit too much? A good handle on your net worth gives you a window into your finances.

The final helpful number is your debt-to-income ratio. As the description indicates, it is the balance you have between debt and income. This is another number your lenders use to decide whether to offer you credit or not. One that is too high may mean you are reaching a point where you can’t pay off your debt. To calculate this number, add up all of your monthly recurring debt obligations and divide that by your gross monthly income. Debt includes mortgage, auto loans, home equity loans, student loans, as well as credit card payments. Generally, mortgage lenders require a ratio of 36% or less for conventional mortgages and 43% or less for FHA mortgages. A higher debt-to-income ratio can be worked on. You may be able to pay off low-balance debt or avoid new debt, for example.

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