- There are five numbers related to finances that everyone should remember.
- These important five numbers are: your credit score, net worth, savings rate, tax rate, and monthly take-home pay and expenses.
- Knowing these by heart will help you make informed decisions so you can make your money work for you.
We tend to remember numbers that are important to us.
Everyone knows how much they weigh. If you were so forward as to ask, the person might say that they don't know or don't remember, but they know. We remember numbers that are important to us.
Ask someone for their credit score and unless they just applied for a loan, chances are they honestly don't know. Your credit score is important but it's not important every day. It's only important in very specific situations and even then, someone else will tell you what it is!
I argue that your credit score is one of those critical numbers you need to know if you wish to succeed financially. It's your key to accessing other people's money. Leverage is how you can borrow time from your future self and your credit score is the key to that time machine.
Today, I want to share with you some financial numbers of yours that you really need to know by heart. They're like your pulse, your blood pressure, and your weight. You don't need to know the exact number at any moment of the day… but you should know the ballpark range.
By the way, this is different than my post on money ratios, which are guidelines as to how much you should be spending on what, how much in savings you need, and things of that nature. That list prescribes the ratios like X% on rent/mortgage, this post is about broader numbers you should know about your finances so you can make informed decisions.
SEE ALSO: 7 simple rules that will make you better with money immediately
1. Your savings rate
Your savings rate is how much of your take-home pay you're saving. This can be saved to a regular old savings account or for your retirement, but it's a measure of what you are not spending each month.
The Federal Research Bank of St. Louis maintains a Personal Saving Rate figure and it's routinely in the low single digits (Jan 2018 was 3.2%). It is the percentage of disposable personal income (DPI), which is similar. It takes your income and subtracts "personal outlays" and "personal taxes" to arrive at your savings, which is then calculated as a percentage.
Why is this number important?
The key to prosperity is to spend less than you earn and then invest that amount so it can work for you. It's important to know how much you're saving and to work on increasing it when you can.
2. Your net worth
Your net worth is simply a measure of your assets minus your liabilities. Take everything you own, subtract it from all the debt you owe, and you have yourself a nice figure known as your net worth.
Why is this number important?
It's like your weight. Your weight is important but it's not the most important. If you suddenly start losing weight, with no clear cause, that's a concern even if you're happier weighing less. The same goes for your net worth.
It's a valuable measure of progress. If you are trying to gain muscle, you will likely see your weight increase and the amount of weight you lift increase as well. If you're trying to get leaner, you'll likely see your weight decrease. There are a million underlying causes but weight, like net worth, is a useful barometer.
3. Your marginal tax rate
Our taxes can be confusing but one key thing to remember is that we have a progressive system of marginal tax rates. You are not taxes the same percentage on every dollar of income.
You start with the marginal tax brackets for 2018, but that's taxable income — you aren't taxed on every dollar you make. You reduce your taxable income by (this is not an exhaustive list, just common ones):
· Your exemptions for you and dependents — $4,150 per dependent, and you, but there are phaseouts
· The standard deduction — $12,000 for single, $24,000 for MFJ (or your itemized deductions, if you sum them up)
· 401(k) and Traditional IRA contributions – up to $18,500 per year for the 401(k)
Take your income, subtract all those, and you have your taxable income.
Boom!
Why is this number important?
When you know your marginal tax rate, you can make smarter tax-related decisions.
If you know you're in the 25% tax bracket, you save $25 in tax on every $100 you contribute to your 401(k). That $100 will grow tax-free until you start taking disbursements, which will be taxed at your tax rate in retirement. That's powerful knowledge.
See the rest of the story at Business Insider