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3 Ways to Know If You Are Financially On Track

Have you ever wondered how your finances measure up for your age? Are you confident you’re doing everything you should to meet your retirement goals? Here are three ways you can measure your financial health:

  1. Your retirement savings rate. One of the best signs of a healthy retirement plan is the percentage of income you are setting aside for the future. You could have a rock star portfolio of investments, but if you aren’t systematically saving, chances are you won’t reach your goals. In 2019, the average savings rate in the U.S. was 7.6% but that’s not enough to get to retirement. Most experts agree that every American should be saving at least 10% of their income for the future. But the savings rate that’s right for you depends on your goals, your age, and your current investment account values. For people under age 40, I would argue that the amount you are saving is actually more important than the amount you’ve accumulated thus far. If you can learn to live without 15% of your income and you choose to save that portion, your chances for living comfortably later in life are very good. If you’re over age 40 but under age 50, your savings rate becomes even more crucial if you feel like you’re behind. Try not to focus on the balance of your investment accounts and concentrate, instead, on how you can find ways to increase the amount you are socking away. If you have the ability to max out your 401(k) contributions ($20,500 in 2022), do it! And for folks over age 50 and still working, you most likely have the ability to defer $27,000 to your 401(k) in 2022. This is a great goal to work towards!
  2. Your cash in the bank. Numerous studies have shown that people who have an adequate cash reserve, are less likely to use credit cards, take 401(k) loans, or deplete their retirement savings when an emergency or opportunity arises. In my experience as a financial advisor, one common denominator between my most financially successful clients seems to be the fact that they have a healthy emergency fund. But how much is enough? I recommend having enough money on hand to replace three months of your take-home pay if you are a two-income household. If you are single or a couple with only one income source, your cash reserve should equal six months of your take-home pay.
  3. Your net worth. You can tell a lot about your financial health by adding up everything you own and subtracting everything you owe. The result of this simple exercise is called your “net worth.” If your net worth is negative, you have some real work to do. If it is positive, the next step is to compare it to where you need to be. One sign of a healthy net worth can be seen when you own sufficient liquid assets (assets you can easily and quickly convert to cash without significant tax penalty or fees) to sustain you through an emergency situation such as a disability, job layoff, or even death of a member in your household. If all of your assets are tied up in retirement plans or real estate, that’s a sign you should focus more on building liquidity. As you age, your net worth should increase each year. If your net worth is growing by 10% or more year-over-year, you are headed in the right direction.

If you want to know whether you are really on-track compared to your peers, reach out to us. We can look at your specific situation and tell you pretty simply. We can also help you determine if you’re doing everything you should to make the most of the money you’ve already saved.

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