Are You Financially Healthy? The 3 Numbers You Should Know

Anna Williams
Posted

When it comes to your money, there are an awful lot of numbers floating around.

From your savings account statement to your investing portfolio, every number tells you something … but some are more revealing than others.

Three numbers in particular give an indication of your overall financial health: Your retirement savings, your debt and your emergency fund.

“These three numbers are your basic financial security,” explains Stephany Kirkpatrick, a Certified Financial Planner™ and vice president of operations and financial advice at LearnVest Planning Services. By getting a handle on these figures, she says, “you’ll begin to develop the foundation to help build your future.”

For guidance, we’ve enlisted Kirkpatrick’s help to explain the significance of these numbers, and how to help make yours represent finances that are in tip-top shape!

RELATED: You’re Out of Debt, Have Savings, and Are on Track for Retirement: So, What’s Next?

1. Retirement

Why does crunching this number matter? Simple. The money you save today will most likely be your primary income source for the entire time you’re retired, which could be 20 years … or far longer. And the secret of retirement savings is that the sooner you start saving, the more time your money has to grow. In other words, if you start investing money at 25 or 30, you’ll actually have to save less (and worry less) in the long run.

Now that increasing numbers of people don’t have pensions to rely on, it’s more crucial than ever that you open the proper retirement account for you. Chances are, it will be just you and your savings to help you retire on a beach, travel the world or gift to your grandkids.

Crunch Your ‘Retirement Number’

First, it’s time to track down all of your retirement accounts. Maybe you put some money away early on in your career—then switched jobs and left that 401(k) behind. (In that case, it’s probably time for a rollover.) Maybe you opened a Roth IRA that you promptly forgot you had. Today’s the day to figure out exactly how much you’ve saved so far.

If sorting through the details of your accounts sounds like a drag, considering tracking them all in one place; LearnVest.com, for instance, lets you link up each of your accounts and see your total savings in one place. Then, just for fun, go ahead and see how your savings compare to others’.

But forecasting precisely how much we’ll need in the bank when it comes time to retire is an inexact science—for starters, there simply isn’t a way to predict how long we’ll live.

But you should have a rough estimate to guide your savings. To predict how much you should aim to save in total, you can start by using a free retirement calculator. The important details to plug in are your current age; the age you plan to retire (67 is standard); your household income; your current savings; about how much you expect your income to increase each year; the percentage of your current income you think you’ll need in retirement (also known as a “replacement ratio”); and the total number of years you’ll need your retirement income to last.

One note: Kirkpatrick recommends a replacement ratio of 85% of your current household pre-tax income at a minimum, but not everyone will need 85% exactly—check out our guide to estimating how much you’ll need to live the retired lifestyle you want.

Now that you have that number with all the zeroes … don’t panic! The earlier you start, the more time your money has to grow. Even if you only sock away $150 a month, that could grow to as much as $78,000 in 20 years. So you can make your contributions count by starting today.

RELATED: The 7 Biggest Retirement Mistakes Financial Planners See

  • Willie Mae Cliett

    is It practical for an average person who doesn’t make a lot of money to have 6 to 9 months of emergency money saved up?

    • Nate

      It is a good idea for everyone, whether you make a lot or a little, to have money set aside for those unplanned expenses. We never know what the next day will be like and having that security blanket of money that just sits there is the best way to keep “murphy” from knocking on your door.

    • paul from nc

      Yes. I agree it may seem harder to do, but remember that the less you make should also mean you need less to save. A 9 month emergency fund for a 100K earner is a lot more than one for a 30K earner because their expenses should be a lot lower. Presumably, lower rent or mortgage payment, car payment, etc. Obviously food and utilities could be the same or higher depending on family size. But overall it should be substantially lower

    • facepalm

      Absolutely. It might take a little longer, but you do it the same way. A little each pay period, automatically into a separate account. Don’t look at it for 5 or 6 months and when you come back you’ll be amazed at how much progress you’ve made.

  • ksgirl73

    Isn’t it a little contradictory to make paying off debt a priority when you pay yourself first?

    • paul from nc

      Not really. What they’re saying is to have an automatic payroll deduction for a 401k, IRA or just savings. After a month or so, you won’t even notice you’re saving. Then make paying off the debt your priority with the remaining take home pay.
      There are 2 schools of thought on paying off debt. The one mentioned, (highest rate first) and paying off the smallest amounts first. The one they talk about is the best, but the other is psychologically more satisfying. If you have 10 different bills and can rid of 3 or 4 small ones quickly. Then put more money into paying the remaining ones. It gives you a good feeling. The key is not to add other debt and constantly whittle down the expenses.