Tuesday, October 26, 2021
Oct. 26, 2021

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Weston: 9 money numbers you need to know

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Your doctor needs to know certain numbers to judge your physical health, such as your weight, your blood pressure and your cholesterol levels.

Similarly, you need to know certain numbers to monitor your own financial health, including:

AFTER-TAX INCOME AND ‘MUST-HAVE’ EXPENSES

Your after-tax income is your gross income minus the taxes you pay (federal, state and local income taxes, plus Social Security and Medicare taxes). If you get a steady paycheck, you can use your latest pay stub to calculate this figure. Otherwise, check your most recent tax return.

Divide your after-tax income by the number of hours you worked to earn it. That gives you a rough idea of how much time you’re trading when you buy something. For example, if you make $20 an hour after tax and something costs $100, you have to work five hours to afford it. Knowing that figure can help you make more conscious money decisions.

Your after-tax income also is the basis for the 50/30/20 budget, a spending plan that helps you balance current expenses, debt payments and savings. That budget suggests limiting your essential or must-have expenses — shelter, utilities, transportation, food, insurance, minimum loan payments and child care needed to work — to 50% of after-tax income. Wants, such as vacations and dining out, make up 30%. That leaves 20% for savings and extra debt payments.

Capping must-haves can help you survive a job loss or other financial setback. You also can use the limits to determine if you can afford a new loan payment. If the payment pushes your must-haves over the 50% mark, the answer may be no.

LIFETIME INCOME AND NET WORTH

You can access your Social Security statement, including your lifetime earnings history, by signing up at socialsecurity.gov/myaccount. Add up your annual earnings, plus any other income you’ve received such as gifts, inheritances, investment income, pensions, under-the-table earnings or government benefits. (Estimates are fine.)

Now, calculate your net worth by subtracting what you owe (your debts, including loans, credit card debts and mortgages) from what you own (your assets, such as your home, retirement accounts, investments and savings). Compare your net worth to your lifetime income to see what you’ve done with the money that came into your hands.

There’s no objective scoring system. Like the hourly wage figure, this exercise is meant to make you more aware of what you do with your money. If you think you should have more to show for the money you’ve received, consider trying to save more of your income.

FULL RETIREMENT AGE AND EXPECTED SOCIAL SECURITY BENEFIT

Your full retirement age is the age at which you are entitled to 100% of the Social Security benefits you’ve earned. If you apply for benefits before that age, your checks will be permanently reduced. If you delay your application until after full retirement age, you can qualify for delayed retirement credits that boost your benefit by 8% each year until 70 years old, when benefits max out.

The full retirement age has gradually been increasing. For those born 1943 through 1954, your full retirement age was 66. After that, full retirement age increases by two months each year: it’s 66 and two months for people born in 1955; 66 and four months for people born in 1956, and so on. The full retirement age is 67 for people born in 1960 and later.

To better plan for retirement, you should have some idea of how much you can expect from Social Security. You’ll find estimated benefits in your Social Security statement. (While Social Security is facing a shortfall, the system will still collect enough taxes to pay at least 75% of promised benefits even if Congress doesn’t act to shore up its finances.)

RETIREMENT SAVINGS RATE

How much of your income are you saving for retirement? Is your savings plan likely to let you retire when you want? (An online retirement calculator can give you a ballpark figure.) Anything you can do to close this gap may help you have a more comfortable retirement.

CREDIT SCORES AND DEBT-TO-INCOME RATIO

You’ll have a better idea of how lenders view your credit applications if you know your credit scores and debt-to-income ratio. (Good credit also can save you money in myriad ways, from interest payments to insurance premiums.) Monitoring at least one of your scores can allow you to see your progress in building credit and alert you to problems, such as identity theft.

To calculate your debt-to-income ratio, combine your monthly debt payments with your current rent or mortgage payment and compare that with your monthly income. A debt-to-income ratio of 36% or less is considered good by most lenders. A ratio over 50% could make it difficult to get approved for new loans. If your ratio is in between those two points, paying off some of your debt could help you qualify for the loans you want (and help you sleep easier at night).

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