Friday, May 22, 2015

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.

Most benchmarks fall into three broad categories—savings, debts, and assets.


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:

  • Savings cushion—The old advice was to save a minimum of three months' expenses as a cushion against job loss or serious illness. These days, many advisers recommend increasing that to eight months. Don't freak out about this large number. Commit to regular saving, use easy and reliable credit union tools like direct deposit and automated transfers from checking to savings, and you'll make steady progress toward this key goal.

  • Retirement—If your employer offers a match for some of your retirement savings, put aside at least that much. Then make it your goal to increase your own contribution by one percentage point each year until you max out. So if you start saving just 4% to get the employer match, when you get a pay increase put at least one percentage point of that raise into your long-term retirement savings. Start this strategy early in your working years and you'll be well-prepared for retirement.

    Think of these ratios as ceilings—you're better off to carry less debt to make sure you meet your savings goals.

  • Personal goals—These might include a house, children's' education, vacation, a new car. Note that these come after your savings cushion and your retirement savings, unless you're lucky enough to be able to save for all the categories at the same time.
There's a Scarlett O'Hara attitude alive in most of us—"I'll think about that tomorrow." The trouble is, tomorrow will be pretty bleak financially if you don't act on your good intentions today.


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:

  • Housing—When you buy a house, lenders will look to see that your combined housing expenses—mortgage, interest, property taxes, homeowners insurance, and association fees—aren't more than 28% of what you earn each month before taxes.

  • All debts—Chances are good that you have other debts besides your mortgage, and the total for that amount, housing expense plus a car loan and student loans, for example, should not be more than 38% of your gross income.

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.


The reward for setting up your savings and managing debts well is that, eventually, you build assets. Here is your benchmark in this category:
  • Net worth—This figure looks at the difference between the value of what you own and how much you owe. Over time, for example, you build equity in your house by paying down your mortgage and by any increases in property value. Similarly, you acquire other things that have value, like cars and boats and jewelry, and build savings and investments.

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.

Don't measure your finances against others'—measure your progress toward your personal goals. The relevant question is, are you making progress? These milestones can help you answer that question.

Financial Fitness Challenge

Financial 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.

Susan Tiffany, CCUFC

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