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Know these numbers, know yourself
Good financial advisers gather a lot of numbers from their clients before they draw up financial plans. There’s no one-size-fits-all solution for money management — the best advice will depend on those figures. If you want to make the best money decisions, here are some of the numbers that you should know, beginning with tracking your spending.
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Track what you spend
This figure helps determine how big an emergency fund you need, how much you should save for retirement and how much life insurance you should buy, among other things. It’s also the starting point of any budget you may want to draw up if you’re trying to pay down debt.
You can track expenditures automatically with Mint or Quicken, or do so manually with spreadsheets or apps such as You Need a Budget. A full year’s worth of expenses can help you see the patterns in your spending, but you can start getting a sense of your outflows with just a month or 2 of data.
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Your after-tax income
You may know your annual pay and the net amount of your paycheck, but the key figure probably lies between those 2.
How to figure after-tax income
Take your gross pay (the amount you earned before anything was taken out), and subtract:
- Federal income tax
- Social Security tax
- Medicare tax
- State and local income taxes
Your after-tax income is often different from your net pay, which can reflect subtractions for health insurance, retirement contributions, union dues and other payroll deductions. If you get tax refunds, you should add those back in to get an accurate after-tax figure.
Your after-tax pay is the starting point for determining how much you should spend on overhead — those “must have” expenses such as shelter, utilities, food, child care, transportation, minimum loan payments and insurance. Limiting “must have” expenses to about half your after-tax pay ensures you’ll have money left over for “wants” — clothing, vacations, dinners out — as well as savings and debt repayment.
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Know your full retirement age
The year you qualify for full, unreduced Social Security benefits is an important figure in your retirement planning. Full retirement age is currently 66 and gradually increases to 67 for people born in 1960 and later. Starting benefits earlier means locking in a permanently reduced check, something you’re likely to live to regret. You also should know the amount you’re projected to receive at full retirement age and at age 70, if you can delay that long to get your maximum benefit. While not guaranteed, those promised benefits likely will be a significant source of income in your retirement and knowing them can help with planning. Speaking of which, you also need to know your retirement savings goal.
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Set your retirement savings goal
One quick, back-of-the-envelope way to estimate this figure is start with your annual spending and subtract expenses that will disappear by retirement age — such as mortgage payments, kid expenses, commuting costs. Subtract also the amount you expect to get from Social Security and pensions, if any. Divide the result by .04 or .03, and that gives you ballpark figures for how much you need to save overall. (4% is considered a sustainable withdrawal rate in retirement, but you may want to choose 3% to be more conservative). You can fine-tune the number and figure out how much to save to get there by using a retirement calculator; Bankrate has a good one.
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Know your tax bracket
You can figure out your average or “effective” tax rate by dividing your total income by the taxes you pay. While interesting, this figure is far less helpful than knowing what your tax rate is on the last dollar you earned.
That’s because income taxes are tiered. You pay 10% federal tax on the first tier, 15% on the next tier and so on, up to the top federal rate of 39.6%.
Knowing your tax bracket or “marginal” tax rate can help you determine how much a deduction such as mortgage interest or charitable contributions can save you as well as how much of each additional dollar you earn will have to go to Uncle Sam. If you’re in the 15% bracket, for example, paying $1,000 in mortgage interest would save you $150 at most in federal taxes. In the 33% bracket, the top savings would be $330.
If you’re in a low tax bracket, you’ll get less benefit from deductions and other maneuvers that are meant to reduce tax bills. The higher your bracket, the more you may want to seek out tax deferral strategies. Also, knowing your bracket can help you decide whether to defer income, if you can. If a bonus or stock sale would push you into a higher bracket, you might want to put it off or spread the income over 2 or more years to lessen the impact.
Here’s another thing to inspect: your credit report. Get your credit report and score today, free and with no obligation, at myBankrate.