6 Numbers Reveal the State of Your Financial Health
Find out what changes you can make to help secure your future
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En español | Just as paying attention to your cholesterol and blood pressure can contribute to your physical health, being aware of a half-dozen numbers about your money can assist in improving your financial well-being. A little time spent seeing where you land along the following financial yardsticks can either reassure you that you're in good shape or give you the guidance you need to improve your situation.
"Breaking down your financial picture into smaller pieces helps you look at your finances objectively,” says Cait Howerton, a financial planner in Atlanta. “It shows the first steps you can take to help you achieve your goals.”
No. 1. Your monthly cash flow
Why you need it: This is the single most important number to know, according to most of the experts we consulted. With one look, you can see whether you're living within your means and are financially stable.
How to find it: First, calculate all the money coming into your household, by adding up your monthly income from working and any other sources, such as rents. Second, figure out your cash outflow by listing your monthly expenses: housing, health care, food, debt payments and more. (Reviewing recent bank statements, credit card bills and other financial statements will make the task easier.) Subtract expenses from income to get the final figure.
What to do with it: If the number is negative — you're spending more than you make — you'll know exactly how many dollars you'll need each month to stop the slide. “You have two levers: You can make more or spend less,” Howerton observes.
Looking at cash flow also lets you know how much you can set aside for longer-term goals, such as saving for retirement, building up an emergency fund, buying a car or paying down debt. “I've rarely, if ever, seen someone look at their inflows and outflows and not change some behavior,” says Barry Glassman, a financial planner based in Tysons Corner, Virginia.
No. 2. Social Security benefit
Why you need it: More than half of older Americans receive at least 50 percent of their income from Social Security. An estimate of the number now will let you know what to expect later.
How to find it: Sign up for a MySocialSecurity account. You'll see how much you're on track to receive if you claim benefits at different ages. On your Overview page, scroll down and click on Go to Retirement Calculator to see how future earnings and alternative retirement dates will change your monthly benefit.
What to do with it: Knowing how much you'd receive at different starting dates can give you a better idea of your future monthly income in retirement and help you decide when to claim your benefit. You can take a reduced benefit as early as age 62, or larger benefits for every month you wait until age 70, when your monthly payouts will be about 76 percent higher. If you're married and are the higher earner, delaying claiming your benefit can also provide your spouse with a larger survivors benefit after your death.
No. 3. Retirement savings
Why you need it: If you'd like to supplement your Social Security income and any pension you're due, this is where that money will come from.
How to find it: Add up the value of any retirement savings and investment accounts you might have.
What to do with it: Divide the amount by 25. If you were in your 60s and quitting work today, that's roughly how much you could safely withdraw from savings in your first year of retirement. Add that number to what you'd get annually from Social Security and other sources. Would that be enough to support the life you prefer? If not, you may want to start saving more, delay your planned retirement date or both. If you're a homeowner, you might also start thinking about whether you might tap your home equity in retirement by either selling your home or perhaps taking out a reverse mortgage.
Revisit your net worth calculation annually: Before retirement it should generally be growing every year, with allowances for dips in the market, advises Mari Adam, a financial planner in Boca Raton, Florida.
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No. 4. Credit score
Why you need it: Taking steps to improve it can give you access to better loan terms; it can also mean lower premiums for car and home insurance in many states, and improve your standing when renting an apartment or applying for a job.
How to find it: You can get a free copy of your credit score from several sources, such as Credit Karma and Credit Sesame, and from some credit card companies and banks.
What to do with it: If your FICO credit score is below 760, you'll want to take steps to improve it to get the best lending rates. FICO scores, which range from 300 to 850, are a commonly used estimate of how likely you are to repay debt; they are calculated based on your credit report, which shows your borrowing history, late payments and current balances.
To boost your score, start by paying your bills on time — the most important factor in determining your score, explains credit expert John Ulzheimer, who previously worked for FICO and the credit bureau Equifax. Your credit-utilization rate — a credit card's balance compared with the limit on that card — is a key factor, too. Alicia Donner, a counselor with the Pittsburgh Financial Empowerment Center, recommends keeping your credit card balances below 30 percent of each card's credit limit, or even lower if you're about to apply for a loan.
No. 5. Debt-to-income ratio
Why you need it: It's crucial for getting a mortgage — and, even more so, for your peace of mind.
How to find it: Add up your monthly debt payments and divide this by your monthly gross income (your income before taxes and other deductions).
What to do with it: “If you're looking to get a mortgage, generally the rule of thumb is you want to keep your debt-to-income ratio below 43 percent,” says Matt Schulz, chief credit analyst at LendingTree.
Even if you're not applying for a loan, this number is a good measure of your financial flexibility. “The lower your debt-to-income ratio, the longer you can make it without a job or stretch your retirement assets,” Howerton points out. Tim Steffen, a senior consultant at the investment management company PIMCO, says, “Most retirees would feel more comfortable going into retirement without a lot of debt, because that's a fixed expense you have hanging over your head. There's the psychological aspect: If it helps you sleep at night, you may want to pay it off.”
No. 6. The highest interest rate on your debt
Why you need it: The loan you owe with the highest interest rate is the one that's causing you the most financial pain.
How to find it: Look on your latest statements or loan origination documents. Quick tip: The most likely candidates are any credit card debt, vehicle title loans or payday loans.
What to do with it: When you're trying to dig out of debt, directing extra cash to your highest-rate debt will give you the biggest immediate return. With current credit card interest rates at about 16 percent, each $1,000 balance on a card will cost you $160 a year; each $1,000 you owe on your mortgage might cost you only $40. Paying off that credit card is the equivalent of a 16 percent guaranteed return on your money. You can’t get a risk-free deal like that anywhere else.
Kimberly Lankford, a longtime columnist at Kiplinger's Personal Finance, is the author of Rescue Your Financial Life.