While knowing your credit score and the elements that impact it is important to your overall financial well-being, I sometimes find that people are overly concerned about it at the peril of other more important financial measurements.
Your credit score only really matters when you’re applying for a loan, a lease, certain types of insurance and increasingly, when applying for a job. If none of those things are on your horizon, then your score is more like your high school ACT scores — perhaps a point of pride, but pretty irrelevant for the time being.
Here are three more important numbers you should be focused on instead:
Your Net Worth
What is it: How much you'd have if you sold everything you own and paid off everything you owe. The equation is basically:
Assets (bank accounts, investments, home, car — basically cash or anything you could turn into cash)
(-) minus
Liabilities (credit card balances, car loans, student loans, mortgages, 401k loans — anything you owe)
(=) equals
Your net worth
Ideal number: As high as possible.
Why it matters: Your net worth is the ultimate measure of your ability to weather financial storms and maintain financial choices in life. The higher your net worth, the more financial freedom you can afford. There are countless cases of people who were millionaires on the asset side but broke on the net worth side as cautionary tales of neglecting this important number. This can make you especially vulnerable during economic downturns when institutions or people call in debts.
How to track it: I calculate my net worth on a monthly basis using Google sheets at the same time I sit down to set up any bill payments for the month. One nice side effect of this is the fact that I’m checking on all of my accounts at least once a month, so I can also do a quick check for anything fishy.
Worth noting: I pay all my credit cards off each month, but I include them on my sheet because it's money I still owe that is reflected in my checking account in the asset section. It’s the only way to have a truly clear picture of what I have. I keep old debts that I've paid off on the sheet like my student loan or an old credit card both for historical accuracy as well as for the psychological thrill of seeing a big fat ZERO under old debts. It’s a little, “Yay me! Look how far you’ve come!” moment each month.
Your Financial Independence Age
What is it: A calculation of when you're projected to have enough saved so that you can pay your expenses from saving without having to earn more (or at least as much as you do now).
Ideal number: As close to your current age as possible, but for most people it's somewhere around 65 or 70.
Why it matters: This is one financial goal that pretty much all of us share but it can also help you
to make decisions about prioritization when making big changes in life. Whenever anyone asks me what to do with extra money or if they can afford to take on an additional debt payment or savings goal, my first question is, “are you on track for financial independence?” Even though it may be one of your longest-term goals, it should be in the top 3 in terms of priorities.
How to track it: There are countless calculators out there, but for people with a 401k or other workplace savings plan, I prefer this Retirement Estimator.
Worth noting: Many people who say they'll never reach financial independence have never run a calculator. Knowing is the first step!
Emergency Fund
What is it: A cash cushion in place to tap into in case of an unexpected loss of income due to job loss or extended illness or injury.
Ideal number: Enough to pay your basic bills for 3 months, which gives you time to make any adjustments if the change to your income is longer than 3 months.
Why it matters: Life happens and when it does, having cash that’s easily accessible takes away much of the financial stress and allows you to focus your energy on finding a job, healing or adjusting to the new normal.
How to track it: If you’re starting from zero, start with a goal of setting three months of rent or mortgage aside. Then tack on three months of your next highest expense and so on until you have all essential expenses covered. Once you’re at three months, make sure you adjust for any changes such as a new home, new baby, etc.
Worth noting: It can be tempting to keep a credit card on hand instead of the cash or want to invest the cash for higher earnings, but resist. Should something happen, consider the probability that it could be due to an economic downturn when credit may not be as easily accessible and/or the stock market could be down. The best place for your emergency fund is in a high yield savings account.
These are the three numbers you want to focus on. Even if you’re not at the ideal numbers yet, you’ll be well on your way to financial freedom if you can find a way to track them on a consistent basis.
And you just may find your credit score improving as well.
Kelley C. Long, CPA/PFS, CFP® is a virtual financial coach who specializes in helping people address the root causes of their financial challenges and anxieties. Visit Working with Me to learn more.