Personal finance ratios keep you on track |
| By Kamil Skawinski
• Bankrate.com |
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Few would disagree that the sooner you start saving
and investing for retirement, the better off you'll be. But the
truth is that many of us have enough trouble just dealing with today's
financial challenges, let alone tomorrow's.
The statistics bear this out. One-third of U.S. households have no retirement savings whatsoever, according to the 2007 Retirement Confidence Survey conducted by Matthew Greenwald & Associates Inc. and the Employee Benefit Research Institute, or EBRI.
Even when it becomes a priority, many of us take a wild guess at how much money we'll need to accumulate for the longest vacation of our lives. Two in 10 U.S. workers, for example, think they'll do just fine with a reserve between $250,000 and $499,999. One-quarter say they'll be OK with a kitty of less than $250,000.
| Over the years, your savings should steadily increase while your debt decreases. |
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Financial planners recommend doing a retirement needs calculation to better prepare for the future. This is a basic planning step that can help individuals determine how much money they'll need in retirement and what they need to save to get there. But only about 40 percent of future retirees bother to do so. As a result, many retirement savings targets are grounded in nothing more than wishful thinking.
But you can save for retirement while achieving other goals, such as reducing debt. One way to take your personal financial pulse and gauge your retirement readiness is to use an automated saving system. The goal is to save 12 times your household income at the time of your retirement.
Personal finance ratios
"One way people can effectively live their lives and at the same time plan for their future is by using ratios -- benchmarks by which they can analyze their financial standing as they move through life and toward retirement," says Charles Farrell, an investment adviser with Northstar Investment Advisors in Denver.
Investors commonly use ratios, such as price-to-earnings
and price-to-sales ratios, to determine the values of publicly traded
companies. Personal financial ratios measure the relationship between
your income, savings and debt levels and give you an instant snapshot
of how you're doing versus a benchmark devised by Farrell. Because
the common denominator for all three ratios is your own income,
they work for anyone.
Set in a table,
two of Farrell's
ratios -- savings-to-income and debt-to-income -- have different
targets at different ages starting at age 30. The third ratio --
savings-rate-to-income -- remains constant at 12 percent.
These targets serve as reference points to help you
determine how well or poorly you're doing at a given moment in time.
They can help you make the necessary adjustments so you can move
from a high-debt, low-savings situation early in life to high savings
and no debt at retirement.
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