May Financial Fitness Challenge—Benchmarks Help Gauge Financial Progress
Your finances, over the long course of your life, could be compared to a motion picture epic. The plot will twist and turn, there will be gains and losses, disappointments and triumphs, and only at the end will you see the complete story line.
Along the way, you can isolate a few stills that identify where you are in the story arc. We call these benchmarks, and they can help you see where you are and point to where you want to go.
Someone viewing your lifetime financial flick from the outside might spot errors in judgment that you miss in real time—it's always easier, sitting in the audience, to tell the hero "Don't drive onto that bridge!" But if you stop and look at the map—those benchmark milestones—you might realize that a bridge is washed out in time to avoid driving into the ditch.
The sure way to live within, or ideally even below, your means is to pay yourself first—save off the top of your paycheck before you even begin paying other bills and obligations. If you can manage this you'll be ahead of the two-thirds of all consumers who live paycheck to paycheck. Where to start?
The conventional advice is to save a minimum of 10% to 15% of your gross income, that is, before any deductions are taken out. This is a hefty chunk and might not be a realistic starting point. But it can become a worthy goal, one you achieve after several months or years. Here's what you're saving for, including short- to long-term goals:
A lot of people never achieve even modest savings goals because they trap themselves in debt early. That's why, ideally, savings come first. If you already have debt, you know that it's preventing you from saving money and from retiring your debts.
The debt-to-income ratio is a figure lenders will look at, along with your credit score and your income, to decide if you're a safe bet for a loan. The ratio measures how much you owe as a percentage of how much you earn:
Lenders might allow some wiggle room on these figures, depending on your earning potential and the overall volume of your debts. Still, think of these ratios as ceilings, not floors—you're better off to carry less debt than these limits to make sure you still can meet your savings goals.
Think of it this way: Every percentage point less that you pay out for a mortgage or a car loan is a percentage point you can use instead to enhance your savings.
Your credit union has tools here, too, to help you meet these targets. Use automated payments for as many bills as you can to avoid expensive and unnecessary late fees and to stay on top of your bills.
Tomorrow will be pretty bleak financially if you don't act on your good intentions today.
It's not a big secret—delayed gratification pays off in more savings and less debt. It isn't always the fun decision, but it's almost always the smart decision. And it's the decision that will help you sleep well.
AssetsThe reward for setting up your savings and managing debts well is that, eventually, you build assets. Here is your benchmark in this category:
As long as your assets are more than your debts, your net worth is positive. Your objective is to make that positive difference grow from one year to the next.
Financial Fitness ChallengeFinancial Fitness Challenge
Your credit union personal finance professionals bring you this website and other tools to help you make the most of your money. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
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