Find out what adjustments you can make to help you plan for the future. Just as knowing your cholesterol and blood pressure may help you improve your physical health, knowing a half-dozen figures about your money can help you improve your financial situation. A few minutes spent looking at where you are on the following economic scales will either comfort you that you’re in excellent condition or provide you with the information you need to better your position.
According to Cait Howerton, a financial advisor in Atlanta, “breaking down your financial picture into smaller sections lets you look at your circumstances honestly.” “It demonstrates the initial measures you may take to attain your objectives.”
1. Credit rating
Why you need it: Improving your credit score may help you get better loan conditions, decrease auto and home insurance rates in many states, and enhance your standing when renting an apartment or applying for a job.
If your FICO credit score is less than 760, you’ll want to work on improving it to receive the best loan rates. FICO scores range from 300 to 850 and are a widely used assessment of how likely you are to repay debt. They are generated using information from your credit report, including information on your borrowing history, late payments, and current amounts.
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Start by paying your bills on time, which is the essential component in calculating your score, according to credit expert John Ulzheimer, who formerly worked for FICO and Equifax. Your credit utilization rate the difference between the amount on a credit card and the limit on that card is also essential. Keep your credit card balances below 30% of each card’s credit limit or even lower if you’re going to apply for a loan.
2. Benefits from Social Security
Why do you need it? More than half of older Americans rely on Social Security for at least half of their income. A rough estimate today will give you an idea of what to anticipate later.
Where to look for it: Make an account with MySocialSecurity. If you claim benefits at various ages, you’ll be able to see how much you’re on course to get. Scroll down to Go to Retirement Calculator on your Overview page to discover how future earnings and various retirement dates may affect your monthly benefit.
What to do with it: Knowing how much you’d get at various start dates will help you estimate your potential monthly income in retirement and determine when to claim your benefit. You may start receiving a reduced gift as early as age 62, or you can get more significant benefits for each month you wait until you’re 70, when your monthly payments would be around 76 percent higherdelaying your benefit claim if you’re married. The more excellent earner might help your spouse get more extensive survivors to benefit from after your death.
3. Savings for retirement
Why do you need it? This is where the money will come from if you want to augment your Social Security income and any pension you’re entitled to.
How to find it: Add up the value of all your retirement savings and investment accounts.
What to do with it: Take the total and divide it by 25. That’s about how much you could comfortably take from savings in your first year of retirement if you were in your 60s and stopped working today. Add it to the money you’d earn from Social Security and other sources each year. Is it enough to sustain the lifestyle you want? If not, you may choose to increase your savings, postpone your retirement date, or do both. If you’re a homeowner, you may want to consider if you can access your home equity in retirement by selling your property or taking out a reverse mortgage.
Annually, review your net worth calculation: Mari Adam, a financial counselor in Boca Raton, Florida, suggests that it should be rising every year until retirement, with allowances for market dips.
4. Your monthly cash flow
Why do you need it? According to most of the experts we spoke with, this is the single most critical figure to know. You can tell whether you’re living within your means and are financially secure with just one glance.
Where to look for it: To begin, tally up your monthly income from employment and other sources, such as rentals, to determine the amount of money flowing into your family. Second, make a list of your monthly costs, including housing, health care, food, loan payments, and so on. (The process will be more straightforward if you review recent bank statements.) To obtain the final total, subtract costs from revenue.
What to do with it: If the figure is negative, which means you’re spending more than you earn, you’ll know how much money you’ll need each month to get back on track. Howerton remarks, “You have two levers: you can produce more or spend less.”
Looking at cash flow may also help you figure out how much you can put away for longer-term objectives like retirement, emergency savings, automobile purchases, and debt repayment. Barry Glassman, a financial adviser in Tysons Corner, Virginia, says, “I’ve seldom if ever, seen someone look at their inflows and outflows and not adjust their behavior.”
5. Debt-to-Income Ratio
Why do you need it? It’s necessary for obtaining a mortgage – and, more importantly, for your peace of mind.
Where to look for it: Subtract your monthly debt payments from your monthly gross income (your income before taxes and other deductions).
What to do with it: According to Matt Schulz, chief credit analyst at LendingTree, “if you’re seeking to secure a mortgage, basically the rule of thumb is you want to keep your debt-to-income ratio below 43 percent.”
This figure is a valuable indicator of your financial flexibility, even if you aren’t looking for a loan. “The lower your debt-to-income ratio, the longer you can go without working or extend your retirement savings,” says Howerton. “Most retirees would feel more comfortable retiring without a lot of debt since that’s a fixed expenditure you have hanging over your head,” says Tim Steffen, a senior consultant at investment management firm PIMCO. There’s also the psychological factor: if it helps you sleep at night, you should consider paying it off.”
6. Your debt has the highest interest rate.
Why do you need it? The loan with the highest interest rate is the one giving you the most trouble financially.
Where to look for it: Examine your most recent bank statements or loan documentation. Credit card debt, automobile title loans, or payday loans are the most probable possibilities.
If you’re attempting to get out of debt, putting additional money toward your highest-interest debt will provide the fastest results. With current credit card interest rates at 16 percent, a $1,000 credit card bill will cost you $160 per year; a $1,000 mortgage would cost you $40 per year. Paying down your credit card is the equivalent of a guaranteed 16 percent return on investment.