5 Numbers You Need to Know

When it comes to managing your financials, there are exactly five numbers you need to know to be effective.

The Five Critical Numbers to Understand Your Money

1. Total income and when the cash flows

What dollars are coming in, and when?  If you don't know this, you won't be able to effectively manage.  If you have a traditional job with a salary, these numbers are easy.  If you're freelancing or getting income from other sources, it will take a bit more digging and a lot more organization to keep track.  You might even need a bookkeeper to help.

2. Your monthly spending

How much is going out every month?  It should always be less than what's coming in, and you should aim to maximize the gap between your income and your spending.  If you aren't, there are two fixes: spend less or earn more.

3. All of your assets

Your house, your car, your investments, and anything else you own.  Keep track of everything.

If you have old retirement accounts with prior employers, roll them over.  If you have old property or things you no longer need, consider selling them.

4. Every penny of your debts

Know what you owe.  Know the interest rate, the amounts, and when it's due to be paid in full.

5. Your net worth and trajectory, which is derived from the four numbers above

Your net worth = Assets - Debts

If your income is greater than your expenses, your net worth will move in a positive direction.  If your spending is greater than your income, your net worth will continue downward in a negative direction.

What to do with this...

Understanding these numbers will ensure that you can keep track of your financial progress going forward.  The goal is to grow your net worth in a positive direction.  From calculating the gap between your income and your spending, you can estimate exactly how your net worth will change month over month.