If you are interested in improving your financial well-being, it can be as easy as understanding some basic numbers. In fact, just a few sets of numbers are the key to understanding your finances today and in the future. Let’s take a closer look those numbers.
1. Net Worth
It’s simple to determine net worth. All you need to do is subtract debt from assets. For instance:
* Autos* Home* Home furnishings* Personal belongings* Savings account* Checking account* Investments (stocks, bonds, etc.)
* Car loans* Home mortgage* Credit card debt* Student loans* Balance of any loans that remains unpaid
Once you discover net worth, it might be a negative number, and this is not good. To improve net worth you have two basic options:
* Increase assets* Lessen debts
2. Equity in the Home
Equity is one of the most important assets you can have. To determine equity, subtract the home’s current value (including appreciation and home improvements) from the mortgage balance. Here is an example. You owe $68,000 on a home and today it would sell for $145,000 (present market value). Subtract 68K from 145K and you get 77K. The home’s equity is an asset of $77,000. In some cases, you could have an “underwater mortgage” and this means you owe more than the property is worth.
To improve home equity, try these strategies:
* Upgrade the kitchen* Upgrade the bathrooms* Do your own improvement work to help increase greatly a home’s value.
3. Gross Earnings
If you receive a regular paycheck, gross income is the amount you’re paid before all payroll deductions. This is the number you must enter on your income tax forms each year. It is not the number to use when you make out a household budget. Instead, you will need to use another number.
4. Take Home Pay
This is also called net income and is the amount you end up with each payday. This is the amount you have to pay bills and all other expenses, and the figure you need for determining the household budget.
5. Monthly Expenses
Everything you must pay out each month is your total monthly expenses. It includes food, utilities, clothes, transportation, housing, and entertainment. This number is so important because you have direct control over personal spending, and it’s a good place to start when it comes to improving your financial picture.
6. Rate of Inflation
Inflation rates today have a huge effect on the future. You need to account for this number when you figure out a plan for the future and retirement. Remember, as inflation goes up, buying power goes down. The average inflation rate has been about three percent annually, but this can vary all the way from ten percent to almost zero.
When you plan for retirement, be sure to include an estimate of inflation over a period of years. Perhaps the best strategy is to overestimate, to ensure you’ll have enough for those golden years.