9/27/2013 5:00 PM ET|
5 financial figures you need to know
Staying in sound financial shape requires more than just knowing the balance of your checking account.
When we talk about personal finance, we toss around a lot of terms: APRs, credit scores, mortgage principals . . . you get the idea. It's easy to get lost in all these numbers, so we're here to break it down for you.
These five may be the most important. They're the difference between a healthy bank account and debt collectors knocking at your door:
No. 1: Your credit score
This may be the most important number ever attached to your name. Your credit score decides your approval for a mortgage or auto loan; it also plays a role in what credit card offers you qualify for. It influences your interest rates on loans, too, and much more. Moreover, many employers evaluate an applicant's score during the hiring process.
To build a high score, you have to be a responsible borrower. That job is a little more complex than it might sound, so we'll start at the beginning: Pay your credit card bills on time and in full.
Once you've got that down, another way to boost your credit score is to take out different types of loans to impress lenders. Their thinking is: If you can handle such responsibilities, you're creditworthy.
That said, don't take out all those loans at the same time, as each results in a hard inquiry, which takes a slight hit on your credit score. Your length of credit history has an impact on your score, and too many accounts opened at the same time may make creditors think you're desperate.
No. 2: Your tax rate
When you file taxes this year, you'll find yourself in one of six brackets, from 10% to 35%. Don't assume, though, that if you fall into the 15% bracket, you pay a flat 15% to the federal government every year -- you'll pay less.
That's because the 15% bracket isn't your effective rate (the final amount you end up paying); it's your marginal tax rate, which says how much your last dollar is taxed.
Confused? Think of taxes as a stepladder: for single people, the 10% bracket ends at $8,700. The next rung on the ladder is the 15% bracket, from $8,701 to $35,350.
If you made $30,000 last year, the first $8,700 you made is taxed 10%; and the rest, that other $21,300 you earned, is taxed 15%. In sum, you end up paying $4,065, which means, again, your effective rate isn't 15% but rather 13.55%, assuming you don't claim any tax deductions, credits or the like.
Here's why this is important: If your employer withholds significantly more than you owe to the federal government, you might ask them to withhold a little less. That way, rather than get the extra cash back as a federal tax return in springtime, you can deposit the money into a savings account right away and start earning interest.
No. 3: Your personal saving rate
In America, saving a large portion of your earnings may be a thing of the past. The personal saving rate -- how much of your disposable income is socked away rather than spent -- is at just 4.6% as of the fourth quarter of 2012.
While this is much improved from a shocking low of 1.5% in 2005, it still represents a major decline from decades past, when Americans overall saved more than 10% of their income. What's worse, in 2010, according to the Federal Reserve, just 52% of Americans spent less than they earned.
With interest rates so low, it's no surprise people aren't depositing as much as they used to. Even long-term CDs, which are normally much higher-yield than the everyday savings account, aren't returning much; on average, CD rates are below 1% APY. Nonetheless, consumers aren't out of options. If you're looking to save, check out online banks or local credit unions, which typically offer better rates than the big banks.
No. 4: Your student loan debt
Americans hold more debt in student loans than in credit cards, to the tune of $1 trillion. Although interest rates on most federal and private loans are less than those for credit cards, the shear amount of debt -- sometimes as much as $100,000 or more -- can make it difficult to afford even the minimum payments. Be sure to know your future obligations when taking out student loans, and take advantage of any beneficial repayment programs offered by your lenders.
You need to get a handle on your student debt, as it will affect the loans you take out in the future. The way you treat your student debt, and really any debt, has a bearing on your credit score, which in turn has a bearing on your interest rates -- or if you'll be approved for the loan at all.
No. 5: Your net worth
It sounds daunting to try to put a dollar value to your name, but knowing this value will help you set smarter goals and create a sound financial plan. To calculate your net worth, you need to make a list of everything you own, everything you owe, and then subtract to find out the difference.
First, add up your assets, then your liabilities (or your total debts). Your rough net assets equation should be as follows:
Net worth = (cash + properties + investments) – (credit card debt + loans + outstanding payments of any other kind).
If you're in the positive, ask yourself: "Am I allocating my resources as best I can to my short-, medium-, and long-term goals?" If all of your money is sitting in a low-yield savings account, hardly beating inflation, consider investing a portion of it to diversify your portfolio.
If you're in the negative, don't stress but rather develop a plan. The most important step you can take is to begin paying off your debt as soon as possible, starting with the loans that are charging you the most in interest.
Once you know where you stand overall, you can budget better for future expenses, such as preparing to buy a car or saving for retirement.
More from U.S. News & World Report:
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AFTER 12 YEARS OF SCHOOLIN' AND 44 YEARS OF WORKING, IT COMES DOWN TO THIS:
IF YOUR OUTGO EXCEEDS YOUR IN-GO, YOU ARE PHUCKED.
WHO SAYS PUBLIC EDUCATION DONT WORK.
since then, i have paid off my car loan and my rental property. i literally have zero debt. and i still have never, not once, missed a payment on anything. i am looking at buying another property, and during the pre-approval my credit was run, and my score has dropped to 793 . . . why? is it because i have no loans?
The average american doesn't even know the balance in their checking account.
It's disturbing that these same people are allowed to vote. look what happened the last time, you all should have known better
I would be saving well over 10% of my income, but most of that is extorted by Uncle Sam.
The idea of credit in this country is just ridiculous. Just having credit cards is a bad financial decision. So, if one's line of credit improves, albeit at a better rate, simply because one borrowed and paid it back, sooner or later one will reach a point where they cannot pay it back, the debt trap.
As for savings, well, people really have no reason to save anymore with money being printed like it is. Then there are those who had to empty their savings just to try to pay off their debt, bills, expenses, loans, and so on.
Repayment plans and deferment options are terrible. If you can't afford to pay the specified amount, how can one afford to pay more plus interest down the road?
Then this article goes on to suggest for people to "diversify their portfolio?" When stocks collapse, all assets are actually used to pay "debts" first, no matter how much the executives have rung up. So stockholders are not likely to get a return on their investment, much less get their money back. Gambling like that shouldn't be encouraged, especially with so many people desperate to pay their bills.
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