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Want financial independence? You have to know these numbers

By Pauline Muindi | January 11th 2020 at 05:00:00 GMT +0300

Although few will openly admit it, many of us are pretty clueless when it comes to the fine details of our personal finance. When it comes to finance, most people just focus on earning money and spending it – not taking a keen look into their personal finance numbers.

But about the details of your financial situation. After all, finance is all about numbers. Understanding some crucial personal finance numbers helps you figure out exactly where you stand so you can figure a way forward.

Ignorance is no defense. Here are the crucial numbers that you should always know top off your head regarding your money:

Net Worth

Personal net worth is a number that many people aren’t aware of, despite always working hard to improve it. Net worth is an important indicator of your financial standing. Your net worth is simply what you own minus what you owe. In other words, your net worth includes is the sum of your savings, investments, and any valuable assets (such as cars, houses, and other expensive items), minus your debts.

This number puts your finances in perspective. You might have a nice car, a mansion, and what seems to be a glamorous life on social media. But if you are struggling to pay off your car loan and mortgage, and your pay check is swallowed by loans, your net worth isn’t high.

Understanding your net worth also gives you a baseline for making financial goals. For example, if you want to boost your net worth by 10 per cent, you will be able to track your growth and take steps to achieve that goal.

Calculating your net worth can be a tricky task. Should you include assets on which you still owe money, such as a house? You can calculate equity by taking the current market value of the asset and deducting what you owe.

What about depreciating assets such as cars? Some people include depreciating assets but remember to adjust this value as the asset depreciates.

Net Income

You’d be surprised by the number of people who don’t know exactly how much they earn, especially after deducting taxes. But if you don’t have an exact number on your earnings how can you figure out how much to save for emergency or retirement?

It’s important to know that your gross income isn’t your “real income”. Too many people make financial decisions around their gross income, which is higher that their net income. This can lead you to spend money that you don’t really have, and mess up your financial development.

For salaried people, it’s easy to tell your net income – it’s written in your pay slip. It’s harder for people with variable income, freelancers and business people. But you should still calculate and make estimations so you can make financial decisions and goals from a more informed position.

Monthly expenses

Once you have figured how much you earn per month, it’s time to determine how much of that goes out each month. This includes the money for rent, utility bills, loan payments, grocery expenses, school fees and so on.

The best way to know how much you spend per month is to create a budget as this will help you to track how much you spend and on what. You will be able to figure out where you need to cut unnecessary expenses so you can pay off debt or save more. If the mention of budgeting makes you feel anxious, there are various mobile budgeting apps which make the task a little easier.

Total debt

Another important number that you should always be aware of is how much you owe. Your debts include mortgage, student loan debt, credit card balance, personal loans, money owed to friends and relatives and so on.

Although this might be a painful task, it is necessary. Once you know exactly how much you owe, you can come up with a clear plan to pay off your debts. Additionally, not all debt is “bad debt”. For instance, student debt might have enabled you to get the education you needed to get into your career, and you might need a loan to take your business to the next level.

While at it, also make an effort to understand the interest rates on your loans. This will help you figure out the best strategy to pay off a loan.

Rate of return

Knowing the rate of return on your investments and retirement accounts is important. The rate of return is the percentage increase or decrease over your initial investment. It represents what you’ve earned or lost on a certain investment.

No, this doesn’t mean that you need to track the stock market every day. But you should look at your statement quarterly to find out how your investments are performing. If you notice worrying changes, call your advisor for an explanation and to figure out the way forward.

Remember, while there’s no way to predict the stock market, using your investments’ history (and a trusted advisor) can help you make wise investment decisions.

Years to desired retirement

Do you how many years you have to work till you can retire comfortably? This is an important number to keep in mind as it shows you how much you have to save each month, and annually to achieve that goal.

First, you have determine the kind of lifestyle you want to live in retirement. Does it involve travelling, just relaxing at home, or working at something you’re passionate about? This will help you to calculate how much you will be spending per year.

Financial experts say that you should account for about 30 years post-retirement. For example, if you expect to spend 500,000 shillings annually, you should have at least 15 million shillings saved for retirement. In addition, remember to account for inflation- even modest inflation can significantly eat into your purchasing power over time.  

Financial Independence Financial freedom Personal Finance Money Dr Pesa
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