Credit Sesame advises on how to read your personal finance dashboard.
A dashboard in a car is designed to give you a lot of essential information at a glance. Imagine you have a personal finance dashboard. Who would it indicate? You car’s dashboard gives you feedback on how you’re driving and the condition of the vehicle. In a similar way, there are six basic numbers you can look at every month to get a quick impression of your personal finances. These give you the big picture on how you’re using money and credit, and what shape your finances are in as a result.
1. Monthly spending = speedometer
Your monthly spending is the equivalent of the speedometer on your personal finance dashboard. Just as a speedometer tells you how fast you’re driving, you should also keep an eye on how quickly you’re spending money.
Your driving speed needs to be put into context. There’s a world of difference between doing 60 miles per hour on a stretch of open highway as opposed to racing though downtown traffic at that speed. Your speed has to be judged in relation to the speed limit.
In financial terms, your spending has to be evaluated relative to your budget. Having budget tells you how quickly you can afford to spend money, like a speed limit tells you how fast you can go in a car. Each month, you should take a look at whether you’re within the limit, or need to slow down your spending.
If you’ve exceeded your budget due to unusual expenses, think of this like speeding up to pass another car. As long as it’s temporary and you slow back down again, you should be okay.
Like the speed of your car, spending has a way of creeping up over time. That’s something you need to beware of. If your spending accelerates steadily, eventually your budget is exceeded.. That’s why you need to regularly check your rate of spending to make sure it’s generally staying within the limits of your budget.
2. Available credit = gas gauge
When people get a credit card statement, they often look only at one thing: the minimum payment they need to make that month.
Perhaps they also look at the total amount they owe. But they should also pay attention a couple other key numbers on the statement: the size of their credit line, and how much of that credit line is still available. Think of this as the gas gauge on your personal finance dashboard.
The credit line is the amount you’re allowed to borrow on the card. The credit available is the amount of the credit line minus the amount you already owe.
Like a gas gauge, the credit available shows how much you have left. Instead of fuel, credit available shows how much more you can borrow.
If using credit has been fueling your lifestyle, and the amount of credit is low, you are running out of gas, metaphorically speaking.
Ideally, you should try to use well under than half your credit line at any one time. That’s like having more than half a tank full of gas available at all times.
3. Retirement savings = oil pressure gauge
Like retirement savings, oil pressure is something you need to keep an eye on or else you may run into serious trouble down the road.
A precise gauge can give you detailed information. So, ideally you have done some detailed planning for how much money you need at retirement, and how much you need to save each year to reach that goal. That way you can check your progress against that plan.
Unfortunately, a lot of cars these days don’t have an oil pressure gauge. They just have an oil warning light instead. That’s not as good because it only comes on when there’s already a problem.
Too many people take the same approach to retirement savings. They don’t measure it regularly. They only realize there’s a problem when they get close to retirement and it’s too late to do much about it. Keep an eye on your retirement savings, just as you do the oil in your car.
4. Credit score = temperature gauge
An engine might run hot for a variety of reasons. The temperature gauge can be compared to your credit score on your personal finance dashboard. A lot of things can affect credit score. Like a temperature gauge, it can be a good first warning that you need to take a closer look at what’s going on.
Waiting until you get turned down for credit to find out your score is too low is like waiting until there’s steam pouring out from under your hood to realize your engine’s running too hot. Better to check the gauge now and then. Sign up for credit monitoring so you are updated daily on changes to your credit status before things go too far.
5. Net debt or savings = engine warning light
Most people have a mix of debt and assets. The key to building wealth over time is to make sure your assets exceed your debt.
In most cars, when an engine light comes on it indicates something needs attention. If the light isn’t flashing the problem isn’t yet critical. It’s the same if you find you have more debt than savings.
Having a net debt position (essentially, a negative net worth) can be survived if it’s a temporary condition. If you find that to be the case, the key is to have a plan for how to bring your debt down below the level of your assets. Don’t ignore the warning and keep going on the way you were before, or this problem could get serious.
6. Missed payments = flashing warning light
Speaking of serious problems, that’s what a flashing warning light on a dashboard means. The personal finance dashboard equivalent is if you are regularly failing to pay your bills.
This means you have a serious problem that is quickly getting worse. Missed bills mean additional expenses. They can also damage your credit for years to come.
If missing payments is anything more than a very rare mistake, you need to sit down and come up with a plan to resolve your debts. You may need professional help to do this. Don’t try to ignore he flashing warning light. It doesn’t just mean trouble is coming; it means trouble is already here.
Checking your personal finance dashboard
When you check your personal finance dashboard, you know things are running smoothly if:
- Monthly spending is within your budget and is less than your after-tax income
- You’re using about a third or less of your available credit
- You have a retirement plan and your savings are on schedule
- Your credit score is at least 670 and holding steady or rising
- You have more savings than debt
- You rarely if ever miss paying bills (less than once every few years)
Otherwise, see what you can do to remedy the situation. If you can’t figure it out yourself, look for someone to help you fix the problem.
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Disclaimer: This guide to buying a house and getting a mortgage is for informational purposes only and is not intended as a substitute for professional advice.