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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In my estimation the #1 thing everyone should do is live below your means! I've done so for decades and as a result have no credit score (useless unless you borrow, which is unnecessary if you live below your means. I've had two tiny loans in my life and I'm doing great!!! Incidentally you can buy a house because the mortgage is held against the property; I've had several.
" . . . the shear amount of debt . . .."
That's "sheer" amount of debt.
why did I read this article?
I don't want to know my credit score. if I did I might want to go borrow money for something I don't need. I financed the truck I just bought based on my banker's knowledge of my character and the fact what I needed was way less than loan value of the truck.
when you don't make much, then tax rate is the last thing you worry about regarding a paycheck.
what's a savings rate? seems like it was pretty high before my divorce from wife #1, but that was 20+ years ago. that and no. 5 (net worth) were taken care of by the divorce from #1, ex-business partners, and some unfortunate health issues that insurance did not cover.
student loan debt....the $2,000 I borrowed was paid off 35 years ago. if I hadn't bought a new car at the end of my freshman year from college savings, I would not have needed the $2,000.
but I am happier now than I have ever been in my life. my retirement and part-time (ahem) job cover my simple needs. I can afford anything I want as long as I want what I can afford.
This is right in line with the government being our example when it comes to debt. Like everyone "needs" it. Current US debt is over $16.7 trillion. The estimated population of the United States is 316,813,123, so each citizen's share of this debt is $52,868.10. How much more do we "need"?
Hmm. So based on this...
... my credit score is nonexistent.
My tax bracket is 10%
My personal savings rate (yearly) is around 2.5 %... but that gets wiped out every year so it's effectively 0%
My student loan debt is 0. My other debt is 0.
My net worth is... probably a couple of thousand dollars if I sold everything I own.
Note: Why am I being downvoted for stating my financial situation truthfully? Very strange.
The number we should be most concerned about is the interest rate available to savers. Thanks to the big banks, the congress, the administration and the federal reserve, that number is easy to remember because it is virtually ZERO. Actually, it is less than zero for those who relied on that number as income because of inflation.
95% of Americans are gradually sliding into poverty and insolvency. Until we impose a formula to appropriately share the wealth of the country, we are simply moving towards anarchy and the end of freedom and democracy.
A Political Crisis:
Charles and David Koch, the billionaire brothers with the second biggest fortune in America, are threating to bankroll primary campaigns by Tea Party extremists challenging Republicans in Congress who don’t go along with their crusade to undo the Affordable Care Act, Sen. Bernie Sanders said on Saturday during a 90-minute presentation at The New Yorker Festival. Then on Sunday The New York Times published a report detailing how the Kochs and others bankrolled a coalition of conservative activists pushing to repeal the health care law and threatening Republicans who won’t go along with closing the government to try to get their way.
It’s “a political crisis,” Sanders said of the shutdown. It is part of a Koch-funded campaign to annul the law that passed Congress four years ago and was upheld by the Supreme Court and was a key issue in the 2012 presidential campaign that President Obama won by 5 million votes. And it is about more than trying to unwind what the American people decided through the democratic process, Sanders stressed. Their agenda is to end Social Security and Medicare, abolish the minimum wage, destroy the EPA and undo every other program enacted in the past half century to protect working families in America, Sanders added.
Picture it, 2040 the Republicans have the power by gerrymandering their districts where they have completely gotten their wish…they’ve destroyed the government. They control: the education system, the banks, and the whole nation. Now picture, pollution from fracking in which sewage fills your backyard, power plants that burn fossil fuel burning coal, your kids getting diagnosed with asthma, leukemia, the GREED in the financial sector is running wild by them setting up back room deals while risking the stability of the housing sector and American lives with another potential depression from their pursuits of power and wealth, the corporations run the schools in which they have privatized it, child labor camps emerge everywhere, more fear, more special interest groups that go after every opportunity for an American to survive, they’ve annihilated the minimum wage, gun-wearing rednecks walking into grocery stores terrorizing our children, more communicable diseases spreading due to people not having healthcare, the corporations own the hospitals and have stopped people from going to the emergency rooms, seniors starving because they have destroyed SS and Medicare, uneducated young people looting because the RepubliCONS have refused to invest in the economy and the education systems of America. Wow, it looks like a storm is coming over the middle class and the poor. It’s time to act and make our voices heard THIS WILL NOT BE THE NEW AMERICA. PLEASE WAKE UP and VOTE THESE REPUBLICON TERRORISTS OUT OF OFFICE IN 2014.
Not mentioned specifically is the financial measure known as the debt ratio. Lenders use that a lot. It is a different kind of "credit score" to evaluate your ability to repay their specific loan, apart from your credit score. (I.E. credit score measures your PAST credit history; not your current situation).
Hello MSN...are you listening?
It's SHEER amount...NOT SHEAR amount!
You guys really need to hire a proofreader...seriously...your contributors lose credibility every time you publish copy with errors like this.
Why does MSM not editorialize the reality of financial truth? The $1 is only worth $.50 cents or less today....with the private corporation, the Federal Reserve Corporation( see Dun & Bradstreet), leading America into fiscal calamity
by the hour. The Washington DC Corporation (ten square miles) is dictated to by the City of London Corporation....and the out-going Berspanky is being replaced by another hit person.
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