Six simple calculations you can use to gauge your financial situation
Creating a savings dashboard is a quick and easy way to get a snapshot of your overall finances. A savings dashboard takes the information from your budget and other financial statements and turns them into simple and quick percentages so you can get a handle on your overall finances.
Numbers You'll Need
Gross Income: The total money you earn each month before taxes and other withholdings are removed. This is the top line on your paycheck.
Take Home Pay: The total monthly income your receive on your paycheck after taxes and withholdings are taken out. This is the amount the pay check is made out for.
Housing Costs: Total costs for housing including rent/mortgage; insurance; maintenance & repairs; and if you own, taxes and HOA fees.
Required Expenses: The amount of money you need each month to pay required expenses such as rent, car payments, health insurance premiums, debt repayments, and other necessities.
Total Expenses: The amount of money you spend each month to maintain your lifestyle including required expenses and discretionary expenses.
Emergency Fund: The amount of money you have saved in a separate savings account designated specifically for emergencies such as a job loss.
Liquid Savings: The total amount you have in liquid accounts including savings accounts, CDs, mutual funds.
Annual Retirement Contribution: The annual amount you contribute to retirement accounts, including employer matches.
The first gauge on your dashboard is your Trapped Income Gauge. This measures the amount of your income over which you have no control. Take your total Required Expenses and divide them by Take Home Pay. Generally you want to stay below 39%.
Required Expenses / Take Home Pay
The higher this percentage is, the less your ability to make changes in your life. Your rent has to be paid no matter what, and although you can control your rent to some degree, it is not easy to change as it would require a move.
Lowering this percentage will increase your discretionary income, which is the amount of money every month over which you have complete control. People with very low discretionary income have very little capability to make life choices and often can feel trapped by their finances. Having a higher discretionary income can provide you with a greater sense of freedom and control over your spending.
Emergency Fund Ratio & Lifestyle Ratio
These gauges help you see how long you can survive on the savings you have set aside. In other words, how many months could you survive without an income before it starts to significantly impact your life.
Required Expenses / Emergency Fund
First is you Emergency Fund Ratio. Calculate this gauge based on necessary monthly expenses. Take your Required Expenses and divided them by the total amount of money you have in your Emergency Fund. The result is how many months you can survive without an income just paying for the basic necessities of life. Three to six months is a minimum range for your emergency fund.
Total Expenses / Liquid Savings
Your Lifestyle Ratio gauge is calculated by taking your Total Expenses and dividing that by the total amount you have in Liquid Savings. This gives you the number of months you can go while still maintaining your current lifestyle. Although it is nice to know how long you could be out of work and survive, it is equally important to know how long you can live without significantly diminishing your lifestyle. There is no rule of thumb, but the higher you can get this gauge, the more lifestyle stability you have.
Tax Withholding Efficiency Ratio
This gauge can provide you with a quick look into if you need to adjust your withholding rate at work. If you are over your range, you will need to throttle back your withholdings to avoid having a big tax bill in April. If you are under, increase your withholdings to avoid sending the government more than you owe.
Take Home Pay / Gross Pay
Below are the approximate percentages for ranges of annual income. If your gauge deviates significantly from the guideline percentages, discuss it with your accountant. These percentages do not take into account your exemptions, excluded income, deductions, nor other adjustments on your tax return, so this is a starting point for a discussion and not something to be used to adjust your withholdings.
- $20,000: 85%
- $50,000: 82%
- $80,000: 80%
- $100,000: 78%
Your retirement ratio provides you with a quick gauge for how you are doing preparing for your golden years. For a more detailed look at the retirement ratio, check out Get Your Retirement Back On Track.
Retirement Contribution / Annual Income
Your retirement ratio will help you measure your contribution to your retirement plan. The ratio will provide you with the percentage of your income devoted to funding your thirty year vacation.
The housing ratio gauges whether or not you are overspending for your current housing. Take your total monthly housing costs and divide them by your take home pay.
Housing Costs / Take Home Pay
Your total cost of housing should be around 28% of your take home pay or less. If you rent, you want to keep the number below 25% to leave room in your budget for saving for a down payment on a purchase. If you are approaching 40%, you are redlining this gauge.
In just a few minutes a week, you can achieve your financial goals. Each week you will receive a simple action item to take to improve your financial situation. Visit our financial challenge page and commit to building your financial plan one week at a time.