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, CFP®, 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."
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 peopledon'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.
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.”
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.
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.
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 to your LearnVest.com account. Think: your mortgage, car loan, student loans or credit card debt. Then consider the below strategies to help you start paying them down quicker.
RELATED: Top Debt Mistakes to Avoid
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.
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 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.
3. Emergency Fund
An emergency fund is the amount of money you have in cash savings if your car dies on the way to work, if you break your arm or if you're laid off. The reason you need one is that the last thing you want to do is worry about how you’re going to get by if any of the above happen—or worse, take on debt to do so. “Your emergency fund is your financial foundation, your safety net and your ticket to freedom,” Kirkpatrick explains. That’s why having 3-9 months of net income (depending on your situation) is so critical to your financial health.
If you feel that between your budget essentials, chipping away at debt and trying to pad that retirement account, you couldn't possibly spare any cash for a savings account, don't be discouraged. We know creating this cushion seems daunting, and that it will take time—you won't have a full emergency fund next Tuesday. But, like with most major financial goals, even a few small steps today will help you get on the path toward financial security.
RELATED: 7 Reasons You Need an Emergency Fund
How Much More Do You Need?
By now, the first step should be a no-brainer: Take stock of your current savings, then calculate how much more you need to have a full emergency fund. Bear in mind that while three months of savings might be enough for a single person with a safety net (like family who could help you out), you'll want to aim for six months of savings if you lack a safety net or have kids, and nine full months if you're self-employed.
Now, how do you get on the fast track to hitting that goal? Use these two strategies to streamline your progress.
1) Open a separate account. Your emergency fund should never live in the same bank account as money earmarked for other purposes. “It’s all too easy to eat out of the cookie jar when it’s within reach,” Kirkpatrick explains. “Out of sight, out of mind.” Instead, move your savings into a separate high-yield savings account with a competitive rate ... then leave it alone.
2) Pay yourself first. The best way to save is to make it mindless. Have your employer direct deposit a portion of your paycheck directly into a savings account—you won’t miss what you never saw. If that's not an option at your company, automatic transfers from your checking to your savings are second best. “My secret tip? Set up those automatic transfers to occur on a weekly basis,” says Kirkpatrick. "The more you can normalize cash flow so less money leaves your account at once, the less painful it will feel—and best of all, you’re still hitting that target each month.”
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.