Keeping track of your financial health is a must at almost every stage of life, from saving for your first home to preparing to retire in comfort. Although managing your finances can be difficult, staying organized and maintaining good spending and saving habits can help you create a financial plan. A financial plan is a snapshot of your current finances and goals, as well as strategies to meet those goals. It allows you to make the most of your assets and sets you on a track to financial success.
Without setting goals, it’s hard to track your progress and success. What do you want your life to look like in 5 years? What about 10 or 20 years? Setting goals is the first step to achieving them. You should conduct regular financial health self-assessments throughout your life, as life circumstances and needs can change. We’ve gathered the following helpful tips to keep track of your financial health and start planning for retirement — even if you’ve yet to buy your first house!
Financial Planning: How to Get Started
It’s never too early to start financial planning – it’s recommended to start as a teenager if possible. One simple way to get started is to open a checking account for your teen (for free) and encourage them to put money in the bank. Additionally, they can start tracking their expenses, manually, online or with a personal finance management tool. Teens can also start developing money habits that will serve them later, like making financial goals (like saving for a car or computer) and putting aside 10% of their earnings.
In your 20s and beyond, it’s time to develop good financial money habits, such as building a good credit score, setting up an emergency fund and starting to save for retirement. An emergency fund is intended to cover unforeseen expenses, such as car or home repairs or medical bills. Ideally, an emergency fund should be able to cover about 3 to 6 months’ worth of expenses, but for some, that may be unreasonable. If this applies, start small: Put away $20 per month, and you will have saved over $1,000 in a year’s time, which is a great start.
Developing a budget on the 50/30/20 principle
The 50/30/20 principle is a way to allocate spending for after-tax income. The breakdown is as follows:
- 50% of your take-home pay toward needs (housing, utilities, transportation and other recurring payments)
- 30% toward wants (dining out, clothing, entertainment)
- 20% toward savings and debt repayment.
This principle is sometimes categorized as 50/20/30, which allocates 20% to wants and 30% to savings. If you are finding that over 50% of your income is going toward the needs category, you may need to consider where in that category you can cut back, such as carpooling or taking the bus to work instead of driving alone.
Credit Score 101
Credit scores are an important metric to measure your financial health. Your credit score is calculated by a series of algorithms based on your payment history that tells potential insurers, employers and others how responsibly you manage debt. Your credit score is important for many reasons, such as when you need to be approved for mortgage loans or rental agreements.
Credit is a major factor in determining the price of the house you can afford. Good credit will help you borrow more from the bank and spend less up front, while bad credit incurs high interest rates, high fees and a higher down payment. Everyone is allowed to run their credit report for free once a year from each of the three credit bureaus: Equifax, Experian and TransUnion.
Credit score breakdown:
- Excellent credit: 720+
- Good credit: 690-719
- Fair credit: 630-689
- Poor credit: 300-629
Raise Your Credit Score
Here are a few simple yet effective ways to raise your credit score:
Pay bills on time: You can build your credit score by paying credit card bills on time, making one-time payments and paying your credit card bills in full.
Become an authorized user: Adding yourself to an already established credit card user (like a parent or grandparent) can help raise your score.
Consolidate your debts: If you have high-interest debt, consider using a personal loan to consolidate all your debts at a lower interest rate.
Check for mistakes: There may be a mistake in your credit report. It’s important to monitor the information to make sure it is accurate. You even can dispute the error with the credit company that ran your credit score if you believe it to be inaccurate.
Planning for retirement is one of the most important long-term financial goals you can maintain, but it takes time to strategize and plan. To get started, consider your target retirement age. The younger your anticipated retirement age, the longer you must plan to live on your savings. From there, you can estimate how much you’ll want to live on for each year of retirement. The 4% retirement rule states that for every dollar of income you want in retirement, you need to invest $25. This is based on the assumption that you’ll live for 30 years after retiring.
The sooner you start saving for retirement, the more you can build up and take advantage of compound interest. Compound interest is “interest earned on interest.” For example, let’s say there is $100 in a savings account that earns interest at a 10% rate compounded annually. At the end of the first year, you’d have $110. After the second year, you would have $121 ($110 in savings plus $11 in interest). After the third year, you would have $133.10 ($121 in savings plus $12.10 in interest).
Retirement plan options
Please verify options with your accountant or financial planner, as your personal income levels and changing tax rules can impact these figures.
The most common retirement plan options are:
Employer-sponsored retirement plans
Any employer-sponsored plan, such as a 401(k) or 403(b), will allow you to expand your yearly contributions toward the IRS limit of $19,500. After you reach 50 years, the limit increases to $26,000.
Traditional or Roth IRA
Both traditional and Roth IRA accounts allow you to invest up to $6,000 a year, or $7,000 for those 50 or over.
Medicare and Social Security
Medicare is federally-run health insurance for those over 65, or individuals with a disability or a qualified illness. Medicare can help reduce the financial burdens of healthcare costs. Social security is a similar program that provides financial support (not health insurance) for older Americans and Americans with disabilities. To set yourself up for success in the future, it is good practice to regularly review your Social Security earnings.
Individuals can enroll in Social Security benefits between the ages of 62 and 70. The longer an individual waits, the higher the benefits are. Anyone over the age of 18 can create a Social Security account to monitor earnings and get an estimate of future payments.
The more financial planning done before retirement, the easier the transition will be. Simple habits like keeping an eye on investments, savings accounts and monthly spending can make a big difference. A financial advisor will be able to help you stay organized and on track, or you can do so independently.
Take Advantage of Employer Matching
Many employers will match their employee’s retirement contributions up to a certain percentage. To take advantage of this, it’s recommended to max out your contributions or make sure you’re contributing enough to receive the full amount of any employer-matched contributions your company offers.
Calculating Your Own Financial Health
A great way to measure your financial health is to calculate your net worth. To put it simply, net worth is the grand sum of your assets, minus your liabilities. Assets include but aren’t limited to the market value of your property and vehicles, bank account balance, value of investments and life insurance policy. Liabilities consist of debts or loans unpaid. Your income is not a factor in net worth, but rather a snapshot of your financial worth.
It’s recommended to track your net worth monthly, as it will vary. If you notice that your net worth is declining, here are some factors to examine:
- Your asset allocation — the percentage of your money that is invested in each type of asset.
- Credit card statements — how much was spent on irregular or unforeseen expenses.
- Debt-to-income ratio — the percentage of your monthly gross income that is dedicated to debt payments.
You can calculate your net worth manually, with a financial planning app or with the assistance of a net worth calculator.
Easy Savings Tips
There are many things you can do to save money, from turning off lights in the house to save on energy bills to making sure your savings account has a high-interest rate. Here are a few money-saving tips that anyone can take advantage of:
Get organized: Start tracking your income and spending habits and cut any unnecessary spending.
Cancel unused subscriptions: Unused subscriptions can be a money suck. Take some time to track down old subscriptions and cancel them.
Make your coffee and lunch: Buying a coffee or lunch every day may not seem like a big expense, but it can quickly add up. Start by making your own once or twice a week and build up from there.
Automate your savings: Deposit a portion of each paycheck (around 10%) directly into your savings.
DIY: Instead of hiring a contractor for things like retiling or painting, consider doing it yourself.
Gradually increase retirement savings: As your paycheck grows, so should the contributions to your savings account.
Q: Where can I find a qualified financial advisor?
A: There are many ways to find a qualified financial advisor that aligns with your goals and financial means. You can search on a database, such as NAPFA, or ask friends and family for recommendations.
Q: Can I do financial planning on my own?
A: Yes. You can track your spending, debts and even invest without a financial advisor.
Q: How much savings do I need to buy a home?
A: That depends. There are many factors that go into buying a home, including down payment, loan type, credit history and more. The traditional down payment amount is 20% of the home’s cost, but this varies from loan to loan.
Q: How much should I have in savings?
A: It’s recommended to have at least three months’ worth of expenses in your savings account.
Q: What is the difference between a 401(k) and a Roth IRA?
A: A 401(k) plan is an employer-sponsored plan, while a Roth IRA is an individual plan. Money put into a 401(k) is tax-deductible, while money in a Roth IRA is not. For those in a lower tax bracket, a Roth IRA makes sense. For those in a higher tax bracket, a traditional IRA (if offered by an employer) may be the best choice.