CFO of Life #107: Credit Score or Net Worth - Which KPI should you follow

Measuring what matters is super important, regardless of what you do!

If you don't measure what matters, you risk wasting your time and making the wrong decisions!

?That is why you need to focus on the right KPIs and the right reasons for tracking them. Whatever you spend time on should bring you enough benefits to make up for that time. But it should also provide you with long-term benefits to your life.

It is the same thing with personal finances, you need to choose the best KPIs to track.

?And there are many, many things to track, which can easily get you lost. To help you avoid that trap, in this week’s newsletter, I will break down the topic of choosing the best metric to measure for your personal finances, where the most important points I will cover are:

1. What is Net Worth?

2. Why should I care about my Net Worth?

3. What is a Credit Score?

4. Why should I care about my Credit Score?

5. Which one should you track?

?If this is your first time reading this blog, my name is Simeon Ivanov (Si-Me-On). I write this weekly blog about personal finance called CFO of Life to bring you on the journey towards becoming the CFO of your Life! I hope you like it and that you stick around for the long run!

Now, let’s get into the thick of it!

Have you heard on TV or read in articles that Elon Musk's fortune is equal to 200+ billion dollars? If so, that is exactly what Net Worth is.

?Net Worth is the theoretical amount you have left after all your assets are sold and all your debts are repaid (if possible). This measures just about the amount of money you will have at the end.

?Sadly, many people have a negative or close to no positive net worth as life has gotten super expensive! Now if you want to calculate your net worth without selling all your stuff and repaying all your debts, here is the formula: Net worth = The Value of all your Assets - The Value of all your Debt

?Well, your net worth is a really good measurement of your personal finances, it shows you if you own more money than you have borrowed. And on the way to calculate it, you will learn a lot about what you own and how much you owe.

?For me, tracking my Net Worth was super important as it allowed me to see how my savings and investments are growing and how that relates to my debt. It showed me how, with every following month, I started getting closer to having a positive net worth. Then, when I finally had my net worth move from $0 to $100, it showed me that there was light at the end of the tunnel. It was one of the most empowering moments in my life.

Hopefully, this will give you a great idea of why you should care about your net worth! But if you want more details and explanations, I have written a full article which you can find → here .

?It is the measure that banks use to understand how well you are handling your debt. It calculates how likely you are to pay your loan on time. It also looks at how likely you are to repay loans and what the bank can expect.

?The factors that come within this calculation are:

Payment history - How consistently you pay your bills on time.

Credit use - How much of your available credit do you use? So if you had ￡1,000 credit how much of it did you use on an average month?

History of credit - For how long have you had credit?

New Credit lines - How frequently do you open new credits, and when was the last time you did?

Credit types - What types of different credits do you have, i.e. credit cards, student loans, mortgages, etc?

I hope you are not surprised when I say that your credit score has a huge impact on your life!?

?It influences if you can take debt, how much it can be and on what terms.

?If you have a really low credit score, you might not get any loan at all. Where on the contrary, if you have an exceptional credit score, then you can shave thousands off your mortgage just because you can get a slightly better interest rate.

?In some countries (USA), a higher credit score would also help you when renting a house. Many landlords would require potential tenants to provide a credit score as that shows them how good they are with money.

?A good credit score also helps with credit card limits. The better you are with debt, the more money the credit card company would feel comfortable providing you with.

?I hope you can see the value in taking care of your credit score and how it can benefit your life in the long term!

?You might not like this answer, but it depends. It depends on the point in your life, what your goals are, and what your aspirations are!

?If you are at a point in life where you need to focus on preparing for buying your house, it would be beneficial to focus on your credit score. This would directly influence your ability to get a loan and improve the terms of your loan.

?On the contrary, if you have already purchased your first house and you don't need to take any other loans, it is more optimal to track your Net Worth. It would focus you towards tracking how much you owe on your mortgage and when the pivotal moment of owning more of your house, than the bank, would come.

?But if you ask me, tracking your Net Worth is a lot more important. It has a lot more depth and detail in what it captures, and you have a lot more influence on it. You can easily see how your Net Worth is influenced by your decision and how it grows with your investments.

?It is also a window into your debts, your loans, your assets, your investments and your potential for the future. Whereas your credit score would only show you how good you are at handling debt.?

?Don't get me wrong; you need to check your credit score from time to time, just in case something funny shows on your report, but you should not obsess over it!

?If you want to obsess over something, look for next week's article! It would have some good things to look forward to!

Post #107 in the series CFO of Life #si #personalfinance #CFOofLife