8/18/2014 8:15 PM ET|
Your financial health: 4 vital signs
These key numbers can help you take the pulse of your finances.
Trying to take your financial temperature? It's not just a matter of how much money you have in the bank. There could be millions of dollars there and you could still be off-track if you're investing it unwisely.
Your financial health comes down to a series of ratios. Here's where you should start:
Contrary to big financial numbers that make most people stick their heads in the sand, many obsess about their credit scores, says Greg McBride, chief financial analyst for Bankrate.com. This is especially true for those with low scores who are trying to figure out how to raise them.
Indeed, your FICO credit score -- a ratio determined independently by three credit bureaus and based primarily on your track record of paying bills on time -- is about far more than just being approved for loans.
"It has tentacles into different areas of your life," McBride says, with the potential to affect your insurance rates, job offers and whether or not you are approved for apartment rentals.
Your credit score is also a gauge of your general financial health. "It's a measuring stick that tells you where you stand now, and over time, you want to be in a position to make sure that score is increasing, particularly if you are starting from a low point," McBride says.
You can get a free annual credit report from each of the credit bureaus, but it won't include your actual FICO score, which ranges from 300 to 850. For that, your best bet is a free estimate, which you can get from a site like Bankrate, or it will come with your monthly credit card statement if you have a Discover card. Other credit card companies also offer free credit scores, so be sure to ask.
Otherwise, you can pay TransUnion, Equifax or Experian directly for the information, but it might not be exactly the same number that they provide lenders who ask for your information, according to the Consumer Financial Protection Bureau.
There is no single, correct dollar amount to put aside for retirement, which is why most projections rely on percentages. The most important one is how much of your salary you should put aside for retirement, which experts peg at 15 percent.
By contrast, if you just look at the end number that an online calculator may spit out, "the mountain seems way too big," says Scott Halliwell, a personal finance expert for USAA.
You might see that you need to save $500 a month to meet projections, but you may only be able to save $100. "That's okay," Halliwell says. "At least you know what you have to shoot for."
The important thing is getting in the habit of saving, says McBride. "Particularly for younger people, the number they need to shoot for is 15 percent. And that's a destination, not a starting point. If you're at 6 or 7, that's great, work your way up to 10 percent," he says.
Keep in mind that with a company match, you could even sock away as much as 21 percent of your salary each year.
The number you need to know: How many months could you survive on your savings?
"A lot of folks don't have anything," says Halliwell. "We live in the here and now. But if they knew that number, they'd be more thoughtful."
The ideal amount for a single person is a cash cushion of six months. For a family with kids, you need a year's worth of emergency savings, says Alexa von Tobel, founder and chief executive of LearnVest.com, a financial information and advisory company. But few of us have that, with 76 percent of the country living paycheck to paycheck, von Tobel says.
Indeed, you could get into a lot of financial trouble without an emergency stash. Many people end up leaning on high-interest credit cards for funds, paying dearly for not having saved, says Vera Gibbons, a personal finance consultant for Mint.com. Others dip into retirement money.
"You need to know how much you can conceivably stand to lose even if you take out $5,000," Gibbons says.
Here's why you should not consider your retirement savings as part of your emergency stash: According to benefits consultant Aon Hewitt, if you were 25 when you took $5,000 out of an IRA, you would only have $3,500 after taxes and penalties, which could have otherwise grown to about $75,000 after decades in the account.
The key is to achieve an overall balance in your finances, with about half your income going toward fixed expenses like rent and utilities, 20 percent for financial goals like savings, and 30 percent for day-to-day expenses like groceries and gas, Gibbons advises.
You don't need to wrestle with a calculator to figure this one out.
"It's pretty simple -- just assets minus liabilities," says Bankrate's McBride.
People tend to think of this number as their "wealth," says LearnVest's von Tobel, but it's not really about how much you have at any given point. Rather, people should use net worth as a starting point to see how they are doing down the road.
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So how are the events in MO and this article related?
1) Through the growth of the dependency class and the politicians that cater to their needs and require increased taxes to pay for this dependency reduces your ability to save for your own retirement and a large portion of the population is dependent on the governmental retirement planning program.
2) The same decline of moral values that leads to looting and destruction of property and leads also to the loss belief in self responsibility and a need to depend on the federal government for economic and social solution as opposed to family and neighbors.
3) The creation of a special class within US society has led to people that believe they are above the law. This balkanization is facilitated by the federal government treating people differently under the law based on such qualities as race, sex, age, national origin, sexual preference, marital status, and income. Why should any one US citizen be treated differently under the law than any other US citizen? What should be the basis of this treatment difference?
Interesting post below...wow. I can't believe people come here to read a financial article and rant about the Missouri thing. I don't know much about that deal, so I'll keep it to personal finance.
Why is the credit score the first item? If you have emergency savings, buy what you can afford so that you can do the 15% to retirement, and build your net worth, the FICO score is not real relavant. You can make a million dollars or have a million dollars and your credit scores can be trash. Focusing on a credit score makes you spend money on junk you don't need to build it up. Wrong focal point in contrast of the other points the author makes.
The protesters and liberal democrats are not interested in the truth of how Michael Brown came to be shot to death. More and more he appears to have been nothing more than an oversized thug and hood rat that made some bad decisions.
I guess if blacks and liberals don't like the truth they are entitled to reject it and cling to "not" the truth.
There are two sides to every story folks.
I have always been suspect of the net worth calculation.
Debts are always counted in the calculation. If someone has a house worth $200,000 and a $75,000 mortgage balance (equity =- $125,000) and another $100,000 in a 401-K I would not calculate the net worth at $225,000. If debt is considered, why not bake in the potential tax liability and get a more realistic net worth.
I would subtract 30% for Federal and state taxes off the 401-K (net $70,000) and figure my net worth is really $195,000. This gives people a more realistic picture of their net worth if they had to liquidate
3 yrs of emergency savings-------check
At 4% draw, $250k a yr in retirement benefits, not counting SS benefits--------check
Net worth---------maybe $8 million. Or $6.5 million after taxes.--------check
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