Financial Wellness: Know your numbers for financial well-being
To have a healthy body, you should know your numbers – weight, cholesterol, blood pressure, etc.
You should know, at least roughly, what you make, what you spend, what you owe and what you save.
Knowledge is power, as “School House Rock” taught us. Knowing these numbers is the first step in gaining control over them. Once you know what they are, you can take steps to get them all working in your favor.
There are some other numbers that are also important to know. They’re IRS codes and rules of thumb that will be thrown about as you work to improve your financial health. Here’s a mini glossary to start:
401(k): A retirement plan commonly offered to employees by a company. Employees contribute a portion of their wages to an individual investment account, up to $17,500 a year, the maximum contribution amount in 2014.
Employers often contribute to the account as well, usually in the form of matching dollars or profit-sharing.
The elective salary deferrals are not subject to federal income tax now, but are taxed in retirement, along with the earnings. This is not the case, however, with Roth 401(k) deferrals, which are taxed now but are not taxed when distributed.
403(b): A retirement plan similar to a 401(k) but is offered by public schools or certain nonprofit organizations.
457: Again, a retirement account similar to a 401(k) but typically offered to city, county and other public employees.
529: A college saving plan that offers tax benefits. Each state has its own 529, and anyone can enroll in any state’s plan, though there are typically more benefits for in-state residents. For example, North Dakota’s 529 plan, College SAVE, has matching grant dollars available, and allows a state tax deduction for contributions.
80-10-10: A common budgeting principle where 80 percent of your income is for living, 10 percent for saving and 10 percent for giving.
W-2: This is the wage and tax statement you’ll get from your employer every year, showing how much you earned and how much tax was withheld. If you’re self-employed or an independent contractor, you may receive a 1099 form from your clients.
Rule of 72: A financial shortcut that tells you about how long it will take for an investment to double.
To use it, divide the number 72 by the rate at which you expect your money to grow. The answer will be the number of years it takes for compound interest to work its doubling magic.
For example, if your mutual fund averages an 8 percent return, your $5,000 investment will double to $10,000 in nine years (72 divided by 8).
Next week, I’ll share several acronyms that are also good to know when you’re focusing on your finances.
So why do these letters and numbers matter? Here’s a few more to end on, from MoneyNews.com:
36: Percent of Americans who say they don’t contribute anything at all to their savings.
46: Percent of Americans who have less than $10,000 saved for retirement.
87: Percent of adults who say they are not confident about having money for a comfortable retirement.
Know your numbers, and you can change your odds.