You know what’s interesting about a lake that’s frozen over? There’s no way to simply look at it and tell if the ice is safe based on its appearance, the temperature, how long it’s been there, or how thick the ice is.
You know what’s interesting about finances? You can fool yourself and others into thinking your financial situation is stronger than it really is – but in reality, your ice is ready to crack!
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Testing The Ice So You Don’t Fall Through
There are ways to test how stable you are financially. Just like the strength of a frozen lake is affected by multiple factors, these financial ratios and guidelines won’t always account for other factors of your personal financial life. They’re still good measures of strength, but they’re just one part of your overall financial health.
Debt To Income Ratio
Gather your debt obligations, including your mortgage, car payment, student loan payment, minimum credit card payment, or other debts you owe monthly on. Divide that number by your monthly income (pre-tax income). This is your debt to income ratio.
Most financial professionals will tell you a healthy ratio is below 36%. If you’re treading on a 40%-50%+ debt to income ratio, you should reevaluate your debt situation and find ways to reduce your obligations.
In general, a good FICO score is anything above 760. If you’re nowhere close, don’t worry just yet. There are ways to improve your credit score. It takes time, but building a good foundation of credit will be helpful in obtaining the best rates for home mortgages and can even affect your ability get a job! (Yes, many employers will screen your credit score before they hire you.)
If you feel like the crack in the monthly budget just keeps getting bigger and bigger, it might be time to rethink your spending habits. Read Dave Ramsey’s book Total Money Makeover and you’ll start to see how people drastically improved their financial strength by making uncommon and even ‘weird’ (as Dave would say) spending cuts.
If you need help with overspending, try using the envelope system to guide you through. It’s one of the best ways to really ‘assign your dollars a home’ each month.
There isn’t a magic number or percentage to show you how much you should be saving and how much you need at retirement. The biggest problem I see with people saving for retirement is that they don’t consider how much a small increase will strengthen their retirement balance at retirement.
Assuming an 8% return, your retirement account can grow by nearly $25,000 after 25 years with every increase of $25 per month to your account. Just think, for every $25 you set aside now, your account will be $25,000 larger than it would be if you hadn’t increased your contribution.
That’s only $12.50 per paycheck. If you can steadily increase your savings by $12.50 every other month, you’ll be well on your way to catch up with your retirement savings.
Surviving The Financial Freeze
The first tip that’s often given for someone who has fallen through ice is: DON’T PANIC. The same is true if you’re realizing that you need to strengthen your financial position. I’m not saying that you should be nonchalant about your situation, but panicking leads to irrational decisions. Your decision to improve your finances needs to be deliberate – not irrational.
Have you ever fallen through the ice…financially? What did you do to get back on track? What do you wish you did to keep from falling in the first place?