Over the weekend I was reading an article in the Wall Street Journal that talked about 15 key numbers to know in order to make smart financial decisions and ensure your financial future.
The numbers they thought you should know included numbers related to investing, taxes, debt, financial planning and credit. Some of the numbers were pretty obvious I thought, but others may not be something you’d think about right off the bat.
Just for fun I thought I’d go through their 15 numbers, and talk briefly about why they believe they’re important to know.
15 Important Numbers To Know
So what are the 15 important numbers that everyone should know? Let’s break them down by category.
If you want to ensure a good financial future, you need to pay close attention to your investments, and how much you’re paying to invest. Here are 5 key numbers to know in investing.
- Percentage of Your Savings in Stocks: While there isn’t really a set answer as to how much of your savings should be in stocks, you should at the very least know how much risk that you’re taking. Your percentage of stocks will depend a lot on your age and risk tolerance, but one rule of thumb is to have your age in stocks, while another is to have twice your maximum tolerable loss in stocks. (25% loss is the max, only 50% or less in stocks).
- Maximum 401(k) Contribution: If you have a workplace 401(k) plan and you’re not contributing to the max, you may want to think about increasing your contributions. For 2015 the max you can contribute to a 401(k) is $18,000, while for a Roth IRA the max is $5,500. Why should you increase your contributions? According to Fidelity Investments the typical worker earning $75,000 and assuming a 7% return over 35 years will earn $365,000 more if they increase their contributions to 10% from 8%. Small changes can mean big returns!
- Price/Earnings Ratio of Stocks: To figure out if it’s a good time to buy stocks, you can figure out what the average price/earnings ratio of the stocks in the benchmark indexes is. For example, according to the Wall Street Journal in January 2015, P/E of the S&P 500 recently sat at 19.73, which was below the average of the past 20 years of 22.47 (but higher than historical average of 16.92 since 1936).
- Average Yield on Bonds: Bonds typically deliver far more predictable returns than stocks, and as such are a good source of safety for most investors in their portfolios. It can be difficult to predict bond returns in the short term, but historically if you look at the current yield of bonds and bond funds, it will give you a good indication of what long term returns will be.
- Average Expenses of Your Funds: An individual investor can’t control what the market does to their portfolio, but there are things that they can control. For example, the expenses they’re paying for their investments. Know what your expenses are and do your best to keep costs low. For me that means investing in low cost index funds that don’t have a lot of fees. Take a look at what your expenses are in your portfolio by signing up and using a service like Personal Capital and their investment checkup tools. Another great place to check what your expenses are is investment site FeeX.
Knowing just how much you make, and what your state’s tax laws are, can be key to your financial well being. Here are 2 key numbers you should know.
- Adjusted Gross Income: Your AGI can have a big impact on which tax deductions and credits you are eligible to claim. You can find your AGI from the bottom of the first page of your Form 1040 tax return. If you find your income is close to a certain threshold for you to be eligible for a certain tax credit, you can do things to reduce your taxable income, like boosting contributions to your 401(k).
- Your State’s Estate-Tax Exemption Amount: If you’re closer to retirement and end of life planning, you may want to figure out what your state’s estate tax exemption amount is. The federal estate tax is due at more than 5 million dollars per individual taxpayer, or 10 million for couples. But many states have much smaller exemption amounts, for example New Jersey has a $675,000 estate tax exemption. If you find you’re near or above that limit you can do things to reduce the estate before you pass, including giving gifts to family members and charity. If you don’t, you could be hit with a estate tax bill of up to 20% (source).
Not only do you have to plan for your investments and taxes, but other day to day numbers are important to know. For example, these 5 planning numbers.
- Your Fixed Living Expenses: You need to get a firm grasp on what your regular recurring expenses are. It is important for retirement planning, for saving up a large enough emergency fund and for figuring out if there needs to be cuts made to your budget. Most advisers are going to recommend that once you figure out what your regular expenses are, that you save up an emergency fund that is equal to 6-8 months of expense, or even more if you’re particularly risk averse.
- Yearly Health-Care Bill: Some health care costs like your insurance premiums can be relatively predictable, while others like your how much of your deductible you end up paying can vary quite a bit from year to year. Take a look back at your spending in previous years and figure out just how much you believe you’ll spend in the coming year. Also factor in which type of plan will be a better deal for your family. A higher premium policy with lower deductibles, or a lower cost plan that has you paying more before coverage kicks in.
- Cost to Rebuild Your Home: Know what your cost to rebuild your home would be, and it isn’t necessarily what your home would sell for. In many cases it’s much less than a sales price once you figure in the cost of the land (which you wouldn’t need to rebuild). The only caveat might be if you have an older home with lots of architectural detail that would be hard and/or expensive to replace. Talk with an insurance agent and/or a local construction contractor to get an estimate of what it might cost to rebuild. For us, we just built our house last year so we have almost an exact estimate of what it would be to replace and rebuild the house.
- Price-to-Rent Ratio: If you’re buying your first home or getting ready to downsize, it’s good to know what the price-to-rent ratio is for your area. To figure that out you would just figure out the average home sale price for your area, and then divide it by the cost of renting a similar property for the year. If the resulting number is less than 20, buying is probably a better option according to some experts. For my area the average sales price was $306,220, and the average rent for the year was $17,568. So that comes out to a price to rent ratio of 17.431.
- Life Expectancy: How long you can expect to live will affect all sorts of decisions you make including how you invest, how much you withdraw in retirement, long term care and more. Figure out what your life expectancy might be using an online calculator like “The Living To 100” life expectancy calculator. Mine wasn’t exactly encouraging at 80 years old, but I know that could improve with some weight loss and exercise added to my regimen.
Another important area to know your numbers in is the area of debt. The 3 most important include:
- Your Monthly Debt Service: You should know what you spend every month on any debt you have such as a mortgage, auto or student loans, credit cards and so on. If more than half your paycheck is disappearing towards debt service every month, you may have problems. A higher level of debt means it’s a lot harder to reach your financial goals. Do your best to reduce the debt where you can by paying off higher interest debt like credit cards, and using a debt repayment plan that fits your needs.
- Your Mortgage Interest Rate: Your mortgage payment is one of those debts that it can be easy to put on auto-pilot and forget about – even though it’s one of your largest monthly bills. Know what your mortgage interest rate is, because it may be too high! You may want to consider refinancing your mortgage into a lower rate, especially if you can drop your rate by at least 1 percentage point.
- Your FICO Credit Score: Your credit score can have a big impact on how much you’ll pay in interest on your next loan. For example, a good credit score versus a bad credit score can mean hundreds of dollars on your monthly mortgage payment, and thousands of dollars extra paid over the life of the loan. To stay on top of your credit score you can check one of the equivalent credit scores at sites like Credit Karma, Credit Sesame or Quizzle, or pay a small fee to get your actual FICO score. Details about how to get your credit score for free here.
So those are 15 of the most important numbers to know in order to make sound financial decisions, according to the Wall Street Journal.
What numbers would you say are important to know, beyond the ones listed above? Which of the above do you think are the most important?