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How financially fit are you – really? The answer lies in the numbers. These 8 key money metrics will give you a snapshot of how well you're managing your personal finances. From debt levels to investment returns, they’ll highlight your strengths, flag any red zones and guide you on what to fix so you can achieve long-term financial freedom.
1. Your debt-to-income ratio
What: the percentage of your income that you pay towards debt each month.
Why it matters: how much of your income you are paying towards debt is a good indicator of if you are overindebted or if your debt is at manageable levels.
In action: use our 1Life Debt-to-income Ratio calculator to work out your ratio. Aim for a maximum ratio of around 40%.
Help: draw up a plan to get out of debt or consider debt counselling that lets you pay off debts and cover living expenses.
Top tip: Read this blog on the hard truths you need to know about debt counselling before you sign up!
2. The interest rate
What: the interest rate is what you earn when you save money as well as the price you pay to borrow money, such as 10% to loan R100 000, which means your loan actually costs you R110 000. Interest rates differ for different types of savings accounts, loans and credit, and per individual. Interest rates can change over time, either increasing or decreasing.
Why it matters: the interest rate you pay to borrow money affects the total amount you repay on any loan or credit facility. You need to be able to afford the repayment of the amount you loaned as well as the interest charged, and if there are increases in the interest rate. For example, if your initial interest rate is 9% and rates rise to 9.5% your loan repayment will increase.
In action: your bank or credit provider can give you details of the interest rates they charge and what rand amount that translates into for your debt and monthly repayments. When the interest rate changes, they will advise the new repayment amount, such as R1 100 a month compared to R1 050 a month for an increase in rates.
Help: you may be able to negotiate a favourable interest rate if you have a good credit record and your debt-to-income ratio is favourable. Always ask your credit provider for a lower interest rate – even if they don’t offer one, you will become better at negotiating future deals!
3. Your credit score
What: a number that shows how well you manage credit.
Why it matters: credit providers look at your credit score to help determine if they will grant you credit. Too low a credit score and your chances of getting the loan you want are minimal.
In action: get your credit score from credit bureaus such as Transunion, Experian and ClearScore. Credit scores differ depending on the credit bureau. Generally, over 650 is good, below 500 is not so good.
Help: aim to pay off debts when due and keep your debt-to-income ratio low and your credit score will increase.
4. The inflation rate
What: the rate at which prices rose over the last 12 months.
Why it matters: you won’t be able to afford your current lifestyle in the years ahead if your income doesn’t keep up with inflation.
In action: work out the future value of your money – for example what R100 will buy in 10 years' time, using the 1Life Inflation calculator.
Help: Statistics South Africa (StatsSA) measure inflation once a month and you can find the inflation number, also known as CPI (consumer price index), on their website on the top horizontal tickertape.
5. Your inflation-adjusted return on investments
What: the growth your investments achieve over and above the inflation rate.
Why it matters: if you are investing for long-term goals such as a new car in 5 years or retirement in 20 years your investments need to beat inflation.
In action: If inflation is 5% and your investment returns 7% you are beating inflation. If they are below 5% you are not beating inflation. And you need to factor in investment fees as well – see point 6.
Help: ask your investment company or financial adviser to work this out for you. If your investments are not returning above inflation, speak to a financial adviser on where and how you should be investing to achieve your goals and beat inflation.
6. Investment fees
What: the charges your investment manager and/or financial adviser levies.
Why it matters: fees reduce your investment returns. If fees are too high, such as 3%, and your investment returns a total of 6%, your net return on investments is 3%. If inflation is 4% you are not even beating inflation.
In action: high investment fees can reduce a net return to 0% or worse! Let’s say you need R500 000 for education costs in 3 years and invest an amount each month. However, at the end of 3 years you have R490 000, because your investment returns after inflation were 2% and fees were 2.5%, higher than your returns!
Help: your investment statements must show investment charges and how they affect investment returns. Your financial adviser can also help you work out the impact of fees on your investment and find ways to lower your investment charges.
7. Your net worth
What: your total assets less your total liabilities.
Why it matters: this shows what you are worth today, such as R1 million, and is an indication of your generational wealth – which you can use to fund expenses in retirement, help loved ones with their wealth building plans and leave to your loved ones when you pass. It will also indicate if you are overindebted, such as when your debts exceed your assets.
In action: use the 1Life Net worth calculator to find out your net worth. Work this out once a year to see if you are growing your wealth or need to focus on paying off debt and saving more!
8. Cash on hand
What: the amount of cash you can lay your hands on quickly.
Why it matters: if there is an emergency you need to know where you can obtain cash and how much, and if you need to find alternatives such as credit cards or loans to fund emergency expenses.
In action: after monthly expenses, work out how much you have in the bank and any savings accounts or money market investments. For emergency fund purposes the recommendation is around 3 to 6 months living expenses.
How did you measure up?
These 8 numbers give you a clear view of your financial situation today – not tomorrow! You can change your money habits and improve your finances. Managing money is a journey that you control. The steps you take today such as paying off debt or negotiating lower interest rates and investment fees will bear fruit in the form of rands in the long term.