Financial Literacy Month—the perfect time to focus on better managing your personal finances for the good of your family’s future. You don’t need a degree in finance to manage money well, but you do need to master some basics. The first step is to find out where you stand.
The following four numbers will help give you a clear picture of your current finances:
1. Expected monthly income
By knowing how much money you have to work with, you can better plan your spending to stay within that amount. If you have regular paychecks of the same amount each time, it’s easy to identify your monthly income by simply adding them up to get the total. However, if you are paid irregularly, or the amount varies, this can be trickier. Obtain as accurate of a number as possible by looking at previous income you’ve received and carefully basing future income estimates accordingly.
2. Total debt
Debt is one of the most significant obstacles to achieving financial goals. If you have a lot of debt, especially from credit cards, it’s important to prioritize paying it down. The first step is to find out exactly how much you owe.
3. Net worth
Net worth is a measurement of your wealth, and it’s a number that can change depending on your current financial situation. It’s calculated by adding up all your assets (things you own, money you have in savings, etc.) and then subtracting all your debts from that number. Use this simple worksheet to calculate your current net worth.
4. Credit score
Your credit score is important because banks and other lenders use it to decide whether or not to give you a loan. If you have a low credit score, you may not qualify for a loan at all, or you may qualify but be required to pay a higher interest rate. Knowing your credit score gives you the heads up to be able to take steps to improve it if it’s low and maintain it if it’s high. Credit scores are based on the information in your credit report so you will want to check it annually to ensure all the reported information is correct. You can obtain free credit reports at annualcreditreport.com.
Next Step: Establish priorities and goals
Once you have a good idea of your current financial situation based on the above numbers, it’s time to evaluate your spending priorities. A good approach is to make a list of all the things you need or want to do with your money such as paying down debt, saving for a car or house, taking a family vacation, or saving for retirement. Designate each item as either a need or a want and then rank in order of importance. For example, if you have a large amount of debt, it’s a good idea to make paying it down a higher priority than saving for a vacation.
Next, use this priority list to decide your short-, mid-, and long-term financial goals. For example, a short-term goal could be to start building your emergency fund by opening an AG Loan Fund Demand Certificate and begin regularly contributing to it. A mid-term goal could be to continue building that emergency savings until it contains three to six months of household expenses. A long-term goal could be to save enough for retirement.
Ultimately, Financial Literacy Month is about increasing your ability to achieve the financial goals that are important to you. Knowing your numbers is the first step. Take time this month to identify where you stand and make a plan for moving forward.