6 figures to financial success
Do your numbers add up?
The Greek philosopher Pythagoras is reported to have said, “Numbers rule the universe.” Not a surprising observation for a man who was also a mathematician. But even ordinary people are often ruled by numbers on an almost daily basis, whether figuring sales tax, measuring a rug for the living room or baking a cake. We even give numbers magical powers, like a perfect 10, lucky sevens or a satanic 666.
Today, we’re perhaps most concerned about numbers that pertain to our personal finances. Depending on our stage of life, numbers can act like mile markers regarding some important questions: Am I saving enough? Is my net worth solid? Can I get a good interest rate with my credit score?
Here are six figures that can add up to a better life and a secure retirement.
Savings-to-income ratio at 35
One might be the loneliest number, according to the rock band Three Dog Night. But if you are in your 30s, you want to strive for a one-to-one ratio when you add up your liquid assets and compare them to your annual income. Liquid assets include a 401(k), an IRA or a brokerage account and savings. But leave your home off the list; it can’t be converted easily to cash. In other words, a 35-year-old making $50,000 should have $50,000 in savings.
The ratio, according to standard wisdom, increases with age. For a couple aged 40, it should be around 1.5 or higher. At age 45, it should be around 3, and at age 50, it should be around 4.5, says Tom Orecchio, principal of Modera Wealth Management in Westwood, N.J. “This ratio will give you a good idea if you are saving enough of your income to reach your retirement goals,” he says.
Years widowed can tax-shield home sale
A surviving spouse selling a primary residence is entitled to the same $500,000 capital gains exclusion that married couples filing joint tax returns are allowed. But there are some requirements. The sale must take place within two years of the death of a spouse. The house must have been the primary residence for two out of the five years prior to the death. A capital gains exclusion cannot have been taken on another residence within two years prior to the death. And the remaining spouse must not have remarried. See this IRS publication for more information.
Months’ expenses in emergency fund
Job losses and the freefall of the U.S. economy during the past two years have put this bit of numerical wisdom to the test. An emergency fund should cover big disasters such as a job loss or time off for medical issues. But right now, so many Americans are struggling just to pay their bills. To many, salting away three months of living expenses seems impossible, let alone the six-month cushion some experts prefer, says Marcia Brixey, author of “The Money Therapist: A woman’s guide to a healthy financial life.”
One suggestion: Don’t put a rainy-day fund in the bank or credit union you use regularly. “It’s way too easy to transfer money into your checking account for things that are NOT emergencies,” Brixey says. Stash contingency cash in CDs, a savings account or money market account. You won’t earn a lot of interest, but it will be easier to access when you really need it.
Ceiling on credit limit to use
To get your credit utilization percentage, divide the sum of all your credit card account balances by the sum of all your credit card limits. If it’s higher than 10 percent, you have three options, according to John Ulzheimer, president of Consumer Education at credit.com. “You can apply for additional credit cards and increase your credit limit, you can lower your credit card debt, or a combination of the two,” he says. Credit utilization is one of the factors that influences your credit score, so “keep that number as low as you possibly can,” Ulzheimer says. Consumers with credit scores of 760 and above have an average utilization of about 7 percent.
Suggested savings rate
Although this figure used to be a minimum of 10 percent, experts now endorse bumping your savings rate up to 15 percent. Subdivide that into 10 percent for retirement and 5 percent for shorter-term savings, such as a vacation. “The rule is sometimes expressed as 90/10 or 85/15 where you spend the first number and save the second number,” Orecchio says.
Minimum FICO score target
FICO, the company whose credit scores are used by most lending institutions to assess a borrower’s creditworthiness, recently released data showing 35 percent of credit card users fall below the 650 mark. That’s up from 27 percent pre-recession. That means more than one-third of Americans are only eligible for subprime loans, Ulzheimer says. On the other hand, a credit score of 750 or above will get you approved for the best deal anybody has to offer, he says.