Thursday, October 19th, 2017

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Is Your Financial Life on Track?

If you want to get your financial life on track but don’t know exactly how to get there, following some simple benchmarks will help.  In fact, most of us have a financial plan in mind and manage to follow it, whether it’s saving a specific amount from our paycheck or keeping credit card debt within a certain range.  But the problem is we don’t know if the plan we’re following is the right one for us.  By using some benchmarks you can give yourself a quick financial check-up and find your strengths and weaknesses.  See how close you come to meeting the following benchmarks:

Cash Reserve
Have 3 to 6 months of living expenses set aside in a checking or savings account as your cash reserve.  Consider having 3 months set aside if there are two income earners in the family and 6 months if there is only one income earner.

Save 5% to 10% of your gross income.  This money should be deposited into a savings, investment, or retirement account.  Gross income is annual income before any taxes are paid.

Charitable Giving
Donate 5 to 10% of your gross income to charity.

Housing Debt
Housing debt expenses (including mortgage principal, interest payments, property taxes, homeowner’s insurance) should not exceed 28% of your gross monthly income.

Example: If you earn $50,000/year, your mortgage payments should not exceed $14,000/year or $1,167/month.


Total Debt
Total debt expenses (including housing debt expense) should not exceed 36% of your gross monthly income.

Example: If you earn $50,000/year, your total debt payments should not exceed $18,000/year or $1,500/month.

Consumer Debt
Consumer debt expenses (credit cards, car loans, personal loans, etc) should not exceed 20% of your monthly net income.  Net income is monthly income after all taxes are paid.

Example: If you earn $50,000/year before tax and $35,000/year after tax, your total consumer debt payments should not exceed $7,000/year or $583/month.

Your total investments should be at least 25x your annual living expenses (or estimated living expenses during retirement).  Keep investing!

Example: If you spend $50,000/year, you will need to have $1,250,000 in your investment portfolio in order to retire.

Life Insurance
You should have 6 to 10 times your annual salary to be adequately insured if someone is dependent on your income.

Example: If you earn $50,000/year you should have $300,000 to $500,000 of life insurance.

By reviewing each benchmark one at a time you’ll be able to break down the planning process into more manageable steps.  Without having to pay a lot of money for professional advice you’ll be able to see where you need to improve and where you’re sacrificing too much of your resources.  You should compare yourself to these benchmarks every three months or any time you experience a major life event such as marriage, divorce, birth of a child, death of a family member, relocation, or job change.

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