How well are you doing financially? Are you in a relatively secure spot, or are you one unplanned bill away from a pile of debt? Knowing where you stand, financially speaking, is important no matter your age. But roughly one-third of Americans don't have an accurate handle on their finances, according to new data from Prudential Financial. And while some folks think they're better off than they actually are, others have some serious work to do on the money front but don't even realize it.
If you're in the dark about your finances, it's time to gain a clearer picture as to how you're doing so you can either keep up those good habits or make changes for the better. Here's how.
1. Create a budget
You might think you know how much money you spend each month on groceries, leisure, and the like. But without a budget, you're more apt to misjudge your spending or lose track of it altogether. So if you're not yet following a budget, set aside some time in the near future to create one.
To do so, list your recurring monthly expenses, factor in sporadic expenses (like that once-a-year warehouse club fee or professional license renewal), and compare your total spending to what your paychecks bring in. If you find that you have enough money left over most months to sock away 15% or more of your earnings, you're in pretty good shape. If not, you'll need to rethink your spending habits to carve out more room for savings. But if that's the case, having that budget will help you easily identify which expenses will be easiest to slash.
2. Assess your near- and long-term savings
We all need savings, and a good way to know how well you're doing financially is to take a look at your various account balances and see how they stack up. First there's your emergency fund. Ideally, it should have enough money in it to pay for three to six months of living expenses. This way, you're protected in the event of a layoff or unforeseen bill.
Then there's your retirement plan. As a general rule, it's smart to save 15% or more of your earnings for your golden years. Additionally, while there's no magic number that guarantees a secure retirement, there are certain savings milestones you can aim to hit throughout your working years. Fidelity, for example, recommends that you have the equivalent of your salary saved by age 30, three times your salary by 40, and six times your salary by 50. Therefore, if you're 40 years old earning $100,000 and you only have $80,000 in your IRA or 401(k), that should serve as a wakeup call that you need to start catching up. On the other hand, if you're in that same scenario with $400,000 to your name, you're in pretty stellar shape.
3. Weigh in on your debt load
Whether you're dealing with the good kind of debt, like your mortgage, or the bad kind, like credit card debt, you should always aim to borrow as little as possible. Having too much debt can leave you with limited wiggle room in your budget and derail your long-term financial goals, like retirement.
So how much debt is too much? Many experts believe that your monthly debt payments, including your mortgage, should not exceed 45% of your monthly take-home pay. But every situation is different, so frankly, you're better off taking a look at the debt you have outstanding and working to pay it off. For example, if you're carrying a large credit card balance at a high interest rate, you could end up throwing out thousands of dollars each year without being any the wiser.
If you do come to realize that your debt load is too high, you can take steps to dig out of that hole and improve your financial outlook. For one thing, consider downsizing if your mortgage payment, coupled with your property taxes and homeowner's insurance, eats up more than 30% of your income. If the issue boils down to a string of credit card balances, see if you can consolidate your debt into a single loan with a lower interest rate, and then cut expenses in your budget to free up the cash to make a dent in it. You might even consider working a side job, at least temporarily, to free up more money to pay down debt.
Knowing where you stand financially will help you make smart choices, so if you've been in the dark about your finances, it's time for a serious self-review. And the sooner you do this, the better.