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Financial literacy isn’t all about dollars and cents; it’s about getting an overview of how your money works, the main drivers of your financial success, and what you need to manage and improve on to live a more financially secure life. Some people pay attention to things like the APY, or the annual percentage return, on their savings account, but may not be aware of other important aspects of their personal finances.
If you want to get smarter about money and have a stronger financial foundation, here are six numbers you need to know.
1. APR credit card
How much interest do you pay on your credit cards? If you pay your credit card bills in full and on time, you don’t have to worry so much about the APR (Annual Percentage Rate). However, if you have a balance and only pay the minimum each month, you should be aware of the cost of your credit card.
Credit card issuers are required to disclose the credit card interest rate and other key information about your credit card. This includes the time it will take you to pay off your balance if you only pay the minimum amount owed each month and the monthly payment required to pay off the balance over three years.
Understanding Your APR Credit Card can help you make more informed decisions about your credit card debt. Do you want to keep racking up interest charges on credit cards every month, or can you prioritize credit card deleveraging faster? Can you sign up for a new credit card with a lower APR and use an interest-free balance transfer to pay off your debt faster without incurring interest charges?
Knowing your credit card’s APR can be a first step in getting out of debt and better controlling your finances.
2. Credit score
Do you know your credit score? And, more importantly, do you know what your credit score means? Credit scores are the primary way lenders decide whether or not you are creditworthy. Having a good credit rating can help you qualify for lower cost loans with lower interest rates and better payment terms.
FICO scores are one of the most commonly used credit scores for consumer credit, with the most common FICO scores on a scale of 300 to 850. Any FICO score above 670 is generally considered “good.” and greater than 800 is “exceptional”. “
Knowing your credit score can help you decide when to apply for a loan. For example, let’s say you want to buy a new car or apply for a mortgage. If your credit score is not as high as you would like, it can motivate you to increase your credit and improve your credit score by making payments on time, paying off your credit card balance and becoming better. focused and disciplined. manage your finances.
Some banks and credit card issuers offer a free credit score to all account holders. In addition to knowing your credit score, make sure you get your free annual credit report at AnnualCreditReport.com. Until April 20, 2022, the three credit bureaus are making these free reports available on a weekly rather than annual basis.
3. Taxes due
During tax season, many Americans celebrate getting a tax refund from the IRS. While it feels good to receive this annual influx of money, don’t just pay attention to how much you get back in your tax refund – consider how much you pay in taxes as well.
You might want to create a spreadsheet that you track:
- Federal income tax
- State income tax (if your state has a state income tax)
- Local income tax (if your city or county has a local income tax)
- Local property taxes (if you own your home)
Keeping track of your total tax burden as a percentage of your income can be revealing. You may realize that you are paying more taxes than you think. Or, you may find that your total tax liability is a reasonable and fair percentage of your overall income.
If you want to reduce the amount of taxes you owe, keep in mind that you can make tax-deductible contributions to some retirement savings plans or 529 college savings plans.
4. Monthly expenses
Do you know how much you spend each month? Calculating your total monthly spend can help you think broadly about what you can save. Knowing how much you spend in a typical month – on all costs, including fixed expenses like accommodation and discretionary expenses like dining out – can help you determine savings goals, like spending money on savings. amount to be saved in an emergency fund.
How much you spend each month is your cost of living, and knowing that number can help you get a big picture of what money means to you and what you’re getting out of your financial life. What are your expenses like in a typical month? How much money do you need to have a comfortable life? What expenses could you do without?
5. Debt-to-income ratio
How much debt do you have and what percentage of your monthly expenses is spent on debt repayment? There is no single correct answer for the amount of debt is too high. But if you’re making payments on different loans like a mortgage, car loan, student loan, and credit card, you might find that your monthly debt payments get a little uncomfortable.
The measure of how much of your income goes to paying off debt each month is known as the debt-to-income ratio, or DTI. In general, lenders like to see a DTI below 36%. Having a DTI above 36% can make it more difficult to qualify for a loan.
Suppose you have a monthly income of $ 5,000 and you have the following monthly repayments:
- Mortgage loan: $ 1,200
- Credit card: $ 200
- Student loan: $ 200
- Auto payment: $ 300
Your total debt payments would be $ 1,900 per month, or 38% of your $ 5,000 income. This debt load may be manageable at this time, but if you want to apply for additional loans, you may not qualify unless you have a high credit score.
Not all debt is bad debt, and sometimes you may need to borrow money to handle emergencies, buy a home, or get a more reliable car. But when you look at your overall financial picture, pay attention to the amount of debt you are paying each month as a percentage of your income. Knowing your DTI can keep you from getting into too much debt.
6. Retirement savings
How much money have you saved for your retirement? How much money do you expect to have when you reach retirement age?
A lot of people worry about saving for retirement, but if you’re in your 30s or 40s, you still have many years of work ahead of you. You still have several decades to grow your retirement savings. Pay attention to three key figures for your retirement savings:
1. How much you have saved for your retirement so far.
2. How much you are likely to receive from Social Security in retirement. The average Social Security retirement benefit is around $ 1,500 per month. You can go to SSA.gov and sign up for “My Social Security Account” for a free personalized estimate of your Social Security retirement benefits, based on your age and income.
3. How much will your retirement savings grow until retirement age (assuming a 7% annual return on your investments)
Consider an example of someone saving for retirement. This person is 35 years old, has already saved $ 50,000 for retirement and wants to retire at 65 (in 30 years).
We will assume that this person earns $ 60,000 per year ($ 5,000 per month) and saves 10% of their pre-tax income ($ 500 per month) for retirement. And that their portfolio offers an average annual return of 7% per annum and compounds annually.
If that person continues to save that same amount per month and works until age 65, they will have a nest egg of approximately $ 947,377. This is in addition to any income they receive from Social Security.
You can use the compound interest calculator on Investor.gov to calculate how much you will have in retirement. Don’t assume that you are too late to save for retirement or that you are falling behind. You may be on your way to retirement more than you realize.
At the end of the line
Understanding your financial life isn’t just about how much money you make or how much money you have in the bank. It’s about understanding the big picture – your debt, your credit, your savings, and your long-term financial goals. Improving your financial literacy regarding these numbers helps your financial stability. Getting the big picture of your finances can help you spend smarter, save more, and be more financially secure for years to come.