Are You Financially Healthy? The 3 Numbers You Should Know

Anna Williams
Posted

Take Action: Increase Your Contributions

“Truly, the hardest part is just getting started,” says Kirkpatrick. If you’ve been dragging your feet until now—whether it’s synching with HR about your 401(k) benefits or setting up automatic contributions to your Roth IRA—make it part of your New Year’s resolution to take that first step.

And while everyone’s retirement savings plan and goals will be unique, you can still start with some general must-dos. First, make sure you’re socking away a minimum of 1% of your annual income, Kirkpatrick directs. And, if your company offers a 401(k) match, “Absolutely do whatever it takes to get the full match available,” she says. “Never leave free money on the table.”

RELATED: Retirement 101: Everything You Need to Know

Another way to rock that retirement account? Schedule increases of 1% to your retirement savings every six months. If your retirement plan doesn’t provide an option for automatic increases upon signing up, you can set yourself a calendar reminder to log into your account and do it manually.

2. Debt

The first thing to know is that not all debts are considered equal. Maybe you have some student loan debt: That’s the first type, called good (or “healthy”) debt, and it includes loans taken to invest in yourself or in something that’s expected to be worth more in the future. Mortgages also fall in this category, Kirkpatrick explains. The other type of debt, considered “bad debt,” doesn’t help you invest in your future—think credit card debt or payday loans. They also typically have higher interest rates.

Kirkpatrick recommends a method called “racking and stacking”—making a list of every loan you have, ranking them in order of highest to lowest interest rate.

RELATED: Top Debt Mistakes to Avoid

See How Much You Owe

We know that tallying up your total debt can be terrifying—looking at this total isn’t our idea of fun, either! But if you don’t do it, you may never have a plan to pay it back.

One easy way to get a handle on your debt is to link up any of your accounts with outstanding balances in the LearnVest Money Center. Think: your mortgage, car loan, student loans or credit card debt.

Step 1: ‘Rack and Stack’

Now it’s time to determine which debts to pay off first. You should always be making minimum payments across the board, but when it comes to allocating the bulk of your money, Kirkpatrick recommends a method called “racking and stacking”—making a list of every loan you have, ranking them in order of highest to lowest interest rate and prioritizing the highest-interest loan first.

Once you’ve managed to clear the most toxic type of debt out of the way, move down the list according to interest rate. By paying the most toward one priority debt at a time, you’ll get the most expensive debt out of the way sooner, and should save a bundle on interest.

RELATED: How I Finally Paid Off a Lifetime of Credit Card Debt

When racking, note that if you carry a balance on a credit card with 0% interest, it doesn’t necessarily belong at the bottom of the list. In fact, it should be one of your top priorities. “0% credit cards tend to have sneaky features,” Kirkpatrick says. “If you’re carrying a balance, you could get hit with deferred accrued interest if you haven’t paid it off when that 0% interest period ends.”

Step 2: Explore Repayment Options

Grads with student loans are automatically enrolled in a standard payment plan; most homeowners settle into 30-year fixed mortgages. And this very well could be the best financial choice for you—but have you ever considered that you might be better off with a different plan?

“Look at each loan and see if there’s a way to attack debt more quickly by changing your payment plan,” says Kirkpatrick. That might mean a graduated payment plan for your student loans (or any other of these seven federal student loan repayment plans), or maybe even refinancing your mortgage, as long as you’re still able to pay it off in the same time frame. Even if you’re unsure of the changes that would suit you best, it never hurts to call your lender and ask.

  • 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.