Four Numbers You Need to Know
When it comes to your finances, you might easily overlook some of the numbers that really count. Here are four numbers to pay attention to now which might really matter in the future.
1. Retirement plan contribution rate
What percentage of your salary are you contributing to a retirement plan? Making automatic contributions through an employer-sponsored plan such as a 401(k) or 403(b) plan is an easy way to save for retirement, but this out-of-sight, out-of-mind approach may result in a disparity between what you need to save and what you actually are saving for retirement. Checking your contribution rate and increasing it periodically can help you stay on track toward your retirement savings goal.
Some employer retirement plans let you sign up for automatic contribution rate increases each year, which is a simple way to bump up the percentage you're saving over time. In addition, try to boost your contributions when you receive a pay raise. While many advisers recommend contributing at least enough to receive the full company match (if any) that your employer offers, I feel that this advice often results in low expectations on a saver’s behalf. Strive to save the maximum amount that the IRS or your plan allows. If your income is not quite there yet, no worries – but target that amount in the future.
2. Credit score
When you apply for credit, such as a mortgage, a car loan, or a credit card, your credit score is one of the tools used by lenders to evaluate your creditworthiness. Your score will likely factor into the approval decision and affect the terms and the interest rate you'll pay.
The most common credit score that creditors consider is a FICO© Score, a three-digit number that ranges from 300 to 850. This score is based on a mathematical formula that uses information contained in your credit report. In general, the higher your score, the lower the credit risk you pose.
Each of the three major credit reporting agencies (Equifax, Experian, and TransUnion) calculates FICO® scores using different formulas, so you may want to check your scores from all three (fees apply). It's also a good idea to get a copy of your credit report at least annually to check the accuracy of the information upon which your credit score is based. You're entitled to one free copy of your credit report every 12 months from each of the three credit reporting agencies. You can get your copy by visiting annualcreditreport.com.
Note that you may be able to get a free credit score from one of the companies if you obtain a trail – but, don’t let your trial be extended to a paid subscription unless you will benefit from that.
3. Debt-to-income ratio
Your debt-to-income ratio (DTI) is another number that lenders may use when deciding whether to offer you credit. A DTI that is too high might mean that you are overextended. Your DTI is calculated by adding up your major monthly expenses and dividing that figure by your gross monthly income. The result is expressed as a percentage. For example, if your monthly expenses total $2,200 and your gross monthly income is $6,800, your DTI is 32%.
Lenders decide what DTIs are acceptable, based on the type of credit. For example, mortgage lenders generally require a ratio of 36% or less for conventional mortgages and 43% or less for FHA mortgages when considering overall expenses. Note that just because lenders use these formulas in helping determine the maximum loan you can obtain, do not default to what the lenders will lend upon. Make wise borrowing decisions based on your situation, and this generally means not obtaining the maximum loan available.
Once you know your DTI, you can take steps to reduce it if necessary. For example, you may be able to pay off a low-balance loan to remove it from the calculation. You may also want to avoid taking on new debt that might negatively affect your DTI. Check with your lender if you have any questions about acceptable DTIs or what expenses are included in the calculation.
4. Net worth
One of the key big-picture numbers you should know is your net worth, a snapshot of where you stand financially. To calculate your net worth, add up your assets (what you own) and subtract your liabilities (what you owe). Once you know your net worth, you can use it as a baseline to measure financial progress.
Ideally, your net worth will grow over time as you save more and pay down debt, at least until retirement. If your net worth is stagnant or even declining, then it might be time to make some adjustments to target your financial goals, such as trimming expenses or rethinking your investment strategy. Financial planners are increasingly using technology to help illustrate a client’s net worth and to strategize on key steps to increase the net worth based on analysis and projections. With the help of a professional, reviewing your net worth in context of your stage in life – and the composition of your net worth -- will help you determine if you are on track.
Modified by Oasis Wealth Planning Advisors with initial preparation by Broadridge Investor Communication Solutions, Inc. Copyright 2017.