Are you tired of living paycheck to paycheck, constantly worrying about your financial stability? Do you worry about never being able to retire? Do you dream of a future filled with financial freedom and security? Discover how six simple numbers can change your life and allow you to build a secure future.
Evaluating your financial status based on the following six numbers can either give you peace of mind about your financial stability or help identify areas that need improvement. Taking the right steps to improve these numbers can lead to financial stability and secure retirement.
#1 Monthly Cash Flow
Regarded as the most significant figure by experts, your monthly cash flow reveals whether you are living within your means and maintaining financial stability.
How to determine it:
- Calculate your monthly income from various sources, including employment and rent.
- List your monthly expenses, such as housing, healthcare, food, and debt payments, by reviewing bank statements and financial records.
- Subtract your expenses from your income to obtain the final amount.
What to do with it: If the number is negative, indicating you spend more than you earn, it reveals the exact amount you need to halt this trend. You have two options: increase your income or reduce your expenses.
Analyzing your cash flow lets you determine how much you can allocate to long-term goals like retirement savings, emergency funds, debt repayment, or major purchases. According to financial planners, a comprehensive look at your inflows and outflows often prompts behavior changes.
#2 Social Security Benefit
More than 50% of elderly Americans depend on Social Security to provide them with at least half of their income. Knowing your estimated benefits now helps you plan for the future.
How to find it: Create a MySocialSecurity account to access an estimate of your projected benefits at different claiming ages. Use the Retirement Calculator feature to see how altering retirement dates and future earnings impact your monthly benefit.
What to do with it: Understanding the potential benefits at different starting dates offers insights into your future retirement income. This knowledge aids in deciding when to claim your benefits. You can opt for reduced benefits as early as age 62 or delay claiming until age 70, which results in higher monthly payouts (approximately 76% higher). If you are the higher earner in a marriage, delaying benefits can also maximize the survivor’s benefit for your spouse after your passing.
#3 Retirement Savings
Your retirement savings, Social Security, and pensions form the foundation for supplementing your income during retirement.
How to find it: Calculate the total value of your retirement savings and investment accounts.
What to do with it: Divide the amount by 25. If you were to retire now, this approximates the annual withdrawal you could safely make from your savings in the first year of retirement. Add this to your estimated annual Social Security benefits and other income sources. Assess if this total is sufficient to support your desired lifestyle during retirement. If not, consider saving more, postponing your retirement date, or both.
Homeowners might also contemplate tapping into their home equity through options like selling their home or utilizing a reverse mortgage. It is advisable to review your net worth annually, with allowances for market fluctuations, particularly before retirement.
#4 Credit Score
Improving your credit score grants access to better loan terms potentially lowers insurance premiums, and enhances your prospects when renting or seeking employment.
How to find it: Obtain a free copy of your credit score from sources like AnnualCreditReport.com, Credit Karma, Credit Sesame, credit card companies, or banks.
What to do with it: Improving your FICO credit score to over 760 can lead to more favorable loan rates. FICO scores, ranging from 300 to 850, estimate your likelihood of repaying debt based on your credit report, which outlines your borrowing history, late payments, and outstanding balances. Start by consistently paying bills on time, as it is the most critical factor in improving your score, according to credit expert John Ulzheimer.
Another important aspect is your credit utilization rate, which compares your credit card balances to their respective limits. Alicia Donner, a Pittsburgh Financial Empowerment Center counselor, advises keeping your balances below 30% of each card’s limit or even lower if you plan to apply for a loan. By taking these steps, you can boost your credit score and enhance your financial opportunities.
#5 Debt-to-Income Ratio
Your debt-to-income ratio is crucial in obtaining a mortgage and provides peace of mind regarding your financial flexibility.
How to find it: Subtract all your monthly debt payments from your gross monthly income (income before taxes and deductions).
What to do with it: If you intend to secure a mortgage, keeping your debt-to-income ratio below 43% is generally recommended. This measure is also indicative of your overall financial flexibility. A lower ratio allows you to sustain yourself longer without employment or stretch your retirement assets. Many retirees find comfort in entering retirement with minimal debt, as it eliminates fixed expenses and offers peace of mind. If possible, consider paying off outstanding debts to lower your debt-to-income ratio.
#6 Highest Interest Rate on Debt
Identifying the debt with the highest interest rate is crucial, as it is the one causing the most significant financial strain.
How to find it: Refer to your most recent statements or loan origination documents. The interest rates on credit card debt, vehicle title loans, and payday loans are usually the highest.
What to do with it: When aiming to reduce debt, allocate extra funds toward paying off the debt with the highest interest rate. This approach yields the most immediate financial benefit. For instance, with credit card interest rates around 16%, every $1,000 balance on a card costs you $160 annually, while a $1,000 mortgage debt might only cost $40. Paying off high-interest credit card debt guarantees a 16% return on your money, unmatched by any risk-free investment. Prioritize tackling debts with high-interest rates to alleviate financial burdens.
Making informed decisions about your future depends on understanding and monitoring these six key indicators. Whether it involves adjusting your cash flow, planning for retirement, improving credit, managing debt, or prioritizing repayments, taking proactive steps based on these numbers will contribute to your long-term financial well-being.