Retirement Plan Contribution Rate
What percentage of your salary are you contributing to a retirement plan? Making automatic contributions through an employer-sponsored plan is a convenient way to save for retirement, but this out-of-sight, out-of-mind approach may result in a disparity between what you need to save and what you are actually saving. There is no magic number, but one common guideline is to save 10% - 15% of your (you and spouse) salary. If you are starting later, you’ll need to look for ways to save more.
If that seems like too much, you should at least contribute enough to receive the full company match (if any) that your employer offers. Each year that you receive a salary adjustment look to increase your contribution, this provides you a simple way to increase your contribution percentage you’re saving over time.
When you apply for credit, such as a mortgage, a car loan, or a credit card, your credit-score will likely factor into the approval decision and affect the terms and the interest rate you’ll pay.
The most common credit score is a FICO Score, a three-digit number that ranges from 300 to 850. At one time, you had to pay a fee in order to check your credit score, but many credit-card companies now offer this as a free service to customers. You should also regularly check your credit report, which contains the information used to calculate your score. You’re entitled to one free copy every 12 months from each of the three major credit reporting agencies. To request a free report, visit www.annualcreditreport.com.
Sometimes borrowing money is not something that is planned out well ahead of time, therefore, maintaining a strong credit score will save you money when it is necessary for you to borrow.
Your debt-to-income ratio (DTI) is another number that lenders may using when deciding whether to offer you credit. A DTI that is too high might mean that you are over extended. Your DTI is calculated by adding up your majority monthly expenses and dividing that figure by your gross monthly income. The result is expressed as a percentage. If your monthly expenses total $2,000 and your gross monthly income is $6,000, your DTI is 33.3%.
Lenders decide what DTIs are acceptable, based on the type of credit. For example, many mortgage lenders usually look for a ratio of 43% or less. While this is an average number, it is important to understand that DTI percentage could vary depending on specific situations.
Once you know your DTI, you can take steps to reduce it if necessary. You may be able to pay off a low-balance loan to remove it from the calculation and/or avoid taking on new debt that might negatively affect your DTI. Check with your lender if you have a questions about acceptable DTIs or what expenses are included in the calculations.
Managing your DTI, is also a key number financial planner’s look to when accessing a person’s ability to retire and meet their monthly obligations.
Your net worth provides a snapshot of where you stand financially. To calculate your net worth, add up your assets (what you own) and subtract your liabilities (what you owe). Ideally, your net worth will grow over time as you save more and pay down debt, at least until retirement. The formula used is: Assets – Liabilities = Net Worth.
If your net worth is stagnant or even declining, then it might be time to make some adjustments to target your financial goals, such as trimming expenses or rethinking your investment strategy. It is recommended to review your net worth at least once a year to make sure you are on track.