As you begin to really hone your financial skills there are a few key numbers that will have a gigantic impact to your journey right off the bat. Being familiar with these will lead you to understanding where you are now and the changes you need to make to be financially successful.
1. Interest Rates on All Debt
Student loans, credit cards (whether or not you carry a balance), car loan, mortgage, personal loan. Gather any debt you have as well as open lines that may be zero, such as credit cards, and list each out with its interest rate. If you have a credit card but don’t currently have a balance, it is still highly important to at least be aware of the rate. You may be surprised at how high certain interest rates are and can use this to prioritize the debt payoff.
Start the attack on the highest interest rate, even if it is not the highest balance. This is likely the credit card, as of this year the average interest rate on credit cards comes in at 15.59% (Source: www.creditcards.com). As you move through canceling out the debt also consider the type of debt and other factors such as tax implications.
If you have a mortgage or student loans, the interest is a tax deduction. So say that a car loan interest rate is equal to the student loans, work on paying the car loan off first since this is a depreciating asset and cannot be used for tax deductions. Keep in mind, however, student loan interest cannot be deducted once you make $80,000 per year.
Being aware of the interest rate can also dictate how you invest and spend excess cash flow. Not all debt is bad debt that should be rushed to be paid off. For example, let’s say your mortgage is your only debt and the interest rate is 3%. Let’s consider the inflation rate as well as the rate of return for the S&P 500. In 2016, the inflation rate in the US was 2.1% (Source: US Inflation calculator) and the S&P 500 hit returns of nearly 12% (Source: CNBC). The mortgage rate is barely above inflation so read that as the money was lent to you at a pretty cheap rate. Conversely, the S&P quadrupled what you were paying for interest. Your money would have gone farther in an S&P index fund than being used to pay off your mortgage more aggressively than your monthly payment.
If you have extra money to throw towards debt, consider spreading it across debt as well as investments to keep the savings up and the debt going down. It is important to continue saving while also paying off debts. You don’t always need to look at debt with evil eyes and attack it with all of your resources. Put those eggs in multiple baskets!
2. Savings Rate
Next, take your gross income and calculate all the amounts divvied up monthly into savings accounts, retirement accounts, and investment accounts. How much of your income are you actually saving? Your savings may vary month to month but take an average and include any payroll deductions you have for retirement accounts.
401(k) contribution: about $85 per month or 2% payroll deduction
Transfer to Savings: average of $200 per month or 4.8% annually
Total = 6.8% savings rate
Have an employer match? Great! But consider that a bonus and count just what you personally are adding, you are only cheating your future self by depending heavily on what others contribute and not saving more yourself.
There is a range of opinions on how much you should save to adequately prepare for the future but generally, the consensus comes in at around 20% of your income. This can, and should, be spread across multiple areas including an emergency fund in an easy to access savings account, retirement accounts, and investments.
It is crucial to not wait to save what is left over from a paycheck, but to save up front and then use what is left (pay yourself first!) An easy way to do this is to set up an automatic transfer from your checking account where your paycheck is deposited to a savings account on the day you get paid. This way, the money is immediately saved and you are only seeing what is left for spending.
Many 401(k) plans also offer an automatic increase option. It typically runs on a yearly cycle and you can choose to set up your contribution to increase 1%. You will barely feel the 1% difference from your take home pay but this will make massive leaps in compounding over the years.
3. Net Worth
Checking account, savings account, credit card, student loans, car loan, stocks, your whole financial picture is most likely spread all across many companies. Your net worth is simply your assets minus your liabilities, but it isn’t always so simple to track frequently when you have holdings in 100 companies.
Personal Capital aggregates everything into one single view and calculates your spending and savings habits in super helpful graphs. It will import the transactions from all of your accounts in a super easy to read, intuitive design. This allows you to see your net worth daily and remove the friction of calculating and tracking all those accounts individually. Seeing this number helps you confirm you are on the correct path and continuously following it towards your goals.