No matter your where you are in your life cycle, staying in sound financial shape for yourself, your family, or your golden years requires monitoring your personal finances. This information is designed to reduce your work to 5 benchmarks that will give you a picture of your financial wellbeing.
No. 1: Your credit Score and Credit Report
Your Credit Score may be the most important number attached to your name. Your credit score decides your approval for a mortgage, auto loan, and what credit card offers and interest rates you qualify for. Moreover, many employers evaluate an applicant's score during the hiring process.
To build a high score, you have to be a responsible borrower. You need to keep up with ALL of your financial obligations not just charge accounts, but all your other bills. If you can handle such responsibilities, you're creditworthy and you will have a higher score. It used to be that checking your Credit Score periodically was enough. With the current climate of hacking and credit card fraud, you probably to look at your full Credit Report periodically.
No. 2: Your effective 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 even if you fall into the 28% bracket, you pay a flat 28% to the federal government every year -- you'll pay less. 28%. Think of taxes as a stepladder: the first portion of your income is taxed 10%; and the next portion is at 15%, and finally working its way up to that 28%. When you add the parts up, your effective rate isn't 28% it is some percentage less.
Here's why it is important to know your effective rate: 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 the government getting to use that excess cash all year, you can take that money and make it part of your savings, investment, or retirement planning.
No. 3: Your net worth
It sounds strange putting a dollar value to your name, but knowing this value will help you get a snapshot of your current financial status / wellbeing. It is the way to analyze where you are and set smarter goals for where you want to be.
To calculate your net worth:
- You need to make a list of everything you own (your assets) = cash + cars + personal property of value +properties + investments.
- Then list your liabilities. These are your total debts (everything you owe) Think about credit card debt + loans + outstanding payments of any other kind.
- Then subtract to find out the difference.
If you're in the positive, ask yourself: "Am I allocating my resources as best I can to meet 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, get rid of old ones and plan your future.
No. 4: Your student loan debt
This number may only apply to a small number of you, but it is important. 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. Your obligation can make it difficult to afford even the minimum payments. You should immediately look for any beneficial repayment programs offered by 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 a future loan or Mortgage at all.
No. 5: Your personal saving rate
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 an average of 4.6% which represents a major decline from decades past when Americans overall saved more than 10% of their income.
The Federal Reserve reports 48% of Americans spent more than they earned.
With interest rates so low, it's no surprise people aren't saving as much as they used to. Nonetheless, consumers aren't out of options. If you're looking to save, check out online banks, local credit unions, or you might want to visit with an investment counselor about retirement funding or other investment vehicles.
Saving, and most especially putting your financial house in order to be able to save for the future, is one of the critical steps you must take in your life.
Even if it doesn’t seem like you have any … YOU CAN save money. There are three secrets to saving that are not only not secrets, but are plain old common sense.
You need to create a budget
Before you can save money you have to know where your money is going. So, it’s time to create a budget. The thing is, you don’t have to make it a chore just sit down and write down the big stuff. How much is being spent on housing, utilities, groceries, debt, and entertainment?
Once you have created a clear picture of where your money goes in a typical month you can begin to spot trends and problem areas. After you’ve found the problem areas you’ll have a better idea of where you can cut back and by how much. See, you can find money to save or put into a retirement plan.
Pay Yourself First
It works. If you’re like most people, you pay the bills, and buy the weekly groceries before deciding how much you can afford to deposit into savings. The amount may be small so you avoid putting any money into savings at all. A Big Mistake.
You need to think of your savings just like you would any other bill. That’s how you need to treat your savings account. If your goal is to save $100 a month then think of that as a $100 bill that needs to be paid. This is the way you are most likely to make that deposit in whatever savings vehicle you have chosen. To keep you on track, you need to have your bank create an automatic deposit into your savings account before you even have a chance to spend it.
Spend Less Than You Earn
This is the holy grail of personal finance, but if you can’t find a way to do this, you’ll never be able to save money. You simply have to spend less money than you earn and there’s no way around that.
If you spend more than you earn you borrow that excess, either from a credit card or some sort of loan. That borrowed money comes with interest. As you begin to do this month after month, it’s easy to see how someone can get tens of thousands of dollars in debt. As this debt mounts you may find yourself just making the minimum payments each month, but that in turn just means you’ll be spending the next ten or twenty years paying for something you couldn’t afford, and spending thousands on interest.
Your budget and automatic savings plan will help you stay out of this bottomless pit. You can save and build wealth for your future!
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