How to mark your financial progress

We all hope to get better with our money, but what does that actually look like? And how can you tell if you’re moving in the right direction? For the most part, I think it’s safe to say that if things are going well, you’ll probably feel it. But it’s not a bad idea to start measuring your progress, to give you something a little more concrete to evaluate.

So if you’re interested in marking your progress, here are a few handy personal financial numbers you can check regularly to see if you’re making positive headway.

Credit score

Credit scores are a very important indicator of your financial well-being and can play a pivotal role in helping you achieve certain milestones. A high credit score is both an indication that you’ve been using credit effectively and a key that can help unlock many doors, financially and professionally.

The thing to remember about credit scores is that they are constantly changing. Your score could swing up or down numerous points based solely on whether or not your most recent payment has been processed yet. So don’t overreact if your score dips minimally. Watching the trend is the most important thing. You want to see your score rise steadily over time as you continue to use credit wisely. If your score is consistently going down and you don’t understand why, you may want to speak to a budgeting counselor to see what may be causing the problem.

Debt-to-income ratio

Debt-to-income ratio is a handy way to see whether or not you’re overextending yourself financially. To find your ratio, simply add up all of your monthly debt payments (that includes things like your mortgage or rent, car payments, student loan payments, and monthly minimum payments on any credit card debt) and divide that by your income for the month.

An ideal ratio is somewhere around 35 percent. A lower ratio means you are carrying less debt than normal, which is great, because it frees you up to focus on other goals, such as saving. A debt-to-income ratio over 40 percent is a warning sign, and could be a precursor to larger problems, such as missed payments or defaulted debts.

In other words, a steady ratio of around 30-35 percent is good; a ratio that goes down over time is great; and a ratio on the rise could be a sign of trouble.

Debt ratio

While your debt-to-income ratio tells you how much of your available money is eaten up by debt payments each month, your debt ratio tells a different, slightly bigger picture story. It’s essentially the value of everything you owe divided by the value of everything you own; or all of your liabilities divided by your assets.

For your assets, think about the value of your home, the value of your car, and all the money you have in checking, savings, or retirement accounts (plus anything else that might be of financial value). Your liabilities are simply all the debts that you currently owe, in total (house, car, student loans, credit card debt, etc.).

Your debt ratio takes a little work to calculate, but it says a lot about the state of your personal finances. A dropping ratio means that either debts are being paid, assets are gaining in value, or a combination of the two. The lower your debt ratio, the better.

Of course, none of these numbers tell the whole story, and no individual number should be a cause for extreme anxiety. The point is to simply see where you are, decide where you’d like to be, and then measure your progress as you move forward. You may fall backwards once or twice. That’s fine, as long you understand what happened and make the necessary changes to get back on track.