Hey, guys.
It's Chelsea from The Financial Diet.
And this week, we are back to basics with regards
to managing and understanding our personal financial
situations.
It can feel overwhelming to take control of our finances,
especially as they pertain to the longer-term.
But there is an entire industry built
on keeping us in the dark about how easy it actually
is to understand money.
We don't necessarily always have to manage
our money ourselves, or at least not every aspect of it.
For example, I have not done my own taxes in many years.
I have a CPA because my taxes are complicated.
But I at least understand what I'm paying and why.
And similarly it is important that everyone
have that kind of a grasp on the basics of their finances
and where they stand.
And when most of us think of where our money stands,
we're thinking about our salary.
What are we bringing in every month and how do we spend it?
But there are a lot of numbers that
go beyond that to give us a full picture of exactly where we
are financially and how to get where we want to be.
So without further ado, here are the eight numbers
everyone needs to know about themselves.
Number one is your credit score.
And a credit score, for those who don't know,
is basically a number that is used to determine your credit
worthiness in terms of how likely you
are to pay things back on time and not borrow
more than you can afford.
Without a doubt, the number that will most often
define your options financially, whether or not
you decide to invest in improving it,
is your credit score.
I should know.
I neglected and/or flat out sabotaged my own credit score
for years in my young adult life,
and only this year I finally made it
into the excellent credit score range--
ta-da!
After almost eight years of working on it.
And I largely ruined it in part because I never
took it seriously.
I only paid attention to how much
I was earning and occasionally how much I
was spending, although I often overspent as well.
This conceptual Number to demonstrate
how responsible and creditworthy I was
was just too abstract for me.
It was like, what's a credit score?
Oh, I can't buy things with it?
Well, then never mind.
But little did I know that a good credit score is not
just essential for doing things like getting a home loan,
it's often essential for things like renting an apartment
or getting a cell phone plan or buying a car.
If I had known my score and been working to improve it,
or at minimum, not so cavalierly wrecked it
in the first few years of my adulthood,
the past 10 years of my finances would
have been totally different.
So check out the link in our description for a video
all about your credit score and how to perfect it.
Number two is your net worth.
Put simply, your net worth is just a math equation.
What you own, your investments, your cash, your real estate,
et cetera minus what you owe, like your debts.
It can be very tough to want to keep track of your net worth
when you don't have many assets and you're deep in debt,
like many people are due to student loans.
Because often for many people, that
means their net worth is technically negative.
But remember that even if you currently
have a negative net worth, that doesn't really
mean much about your financial habits
or your financial potential.
It's just a quick picture of where you currently stand.
For example, you can technically have a negative net worth,
but an excellent credit score.
A lot of people think if they have student loans,
they won't be able to buy a home, but this isn't true.
Just because a person has debt doesn't
mean they can't take on more in the form of something
like a mortgage.
It's all about your ability to pay it off,
which is mostly dependent on your income,
and your reliability in paying it,
which is mostly your credit score.
But on the flip side, a net worth
doesn't really mean much about what
you're earning, because you can have
a high salary and a low net worth
if you're constantly spending beyond your means.
And this is why your net worth is ultimately
more important for future you than current you.
It is important to become OK with times
in which your net worth is low or even negative
while keeping your eye on the general prize
that the goal is throughout your life
to bring it into the positive and ideally just keep
building on it.
Whether it's getting an education
or buying a home, sometimes building longer-term wealth
means making those initial investments.
And keeping your eye on your net worth over the entirety
of your financial journey means that you're constantly
pointing yourself in the right direction.
We'll link you in the description to a good resource
for calculating your net worth.
Number three is your interest rate on student loans.
At TFD, we generally recommend a once-yearly check
in on your student loan payment plan.
Because what you started out with
may not at all be the best payment plan for where
you are at now financially.
And most importantly, you may have
improved your financial health enough that you now
qualify for a much better deal.
For example, if you have a great credit
score that you didn't have when you started your repayment
plan, you could very easily be getting better terms
and a better timeline.
We'll link to our video on everything
you need to know about student loans
where we dive into this more deeply so that you can make
the most educated choices for yourself,
whether you're applying for college
or just paying it off years later.
Number four, similarly, is your interest rate on consumer debt.
Unlike student loans, credit card interest rates
are usually very high.
The average was over 18% for new credit card offers in 2021.
And as with basically any type of debt,
the longer it takes you to pay off,
the more you end up paying in total.
And with credit cards, that matters hugely,
because the interest rates are so damn high.
So we recommend using a credit card debt calculator,
and we'll link you to a good one,
in order to figure out the best plan for your repayment
schedule.
That will be based on things like the amount you owe
and your different interest rates on different cards.
For instance, if you owe $5,000 at an 18% APR,
you can pay off what you owe in 13 months
by making payments of $458.
But once roughly what you're dealing with,
you can explore your options.
If you have good credit, for example,
you may be able to open a 0% APR balance transfer credit card
and transfer over the total credit card debt
you owe for a one-time fee.
These type of cards offer an initial period
without any interest at all, ranging from 6 to all the way
up to 18 months.
Meaning that you could theoretically
transfer over the balance and pay off
the remainder of what you owe without accruing
any additional interest.
The catch, though, is that you have to pay this off
before the intro period ends and the real approximately kicks
in.
But no matter how you go about it,
the point is that you likely have more options than you
think when it comes to managing and paying off your credit card
debt, and at least every six months, it
is worth taking a look at what you're
doing because those interest rates are
so high that even a matter of a few months
can make a big difference.
Number five is what you can afford to spend.
We don't always like to get super granular
when it comes to money, because everyone's spending is
different.
But when you put together a budget,
you need to figure out how to translate it
to your actual everyday life.
A budget is no good if you can't actually follow it.
So whether you're talking about groceries, a night
out, a vacation, new electronics, or anything
else you might be spending on, the point
is to actually know what you can realistically
afford in a given month.
Apps like Mint or You Need a Budget
are great because you can check them last-minute to see
where you stand.
But a good rule of thumb is to have your affordable number
in the back of your mind for different occasions
so that you don't constantly have
to reference your budget sheet.
For instance, if your monthly going out restaurant budget
is $400 and you go out once a week,
you can assume that it's safe to spend
$100 every time you go out.
Of course, your mileage may vary depending on different months,
but having that ability to quickly reference numbers
when you're making shopping decisions
ensures that you're not going to blow up
your budget every month by constantly accidentally going
over.
Number six is your salary in comparison with your industry.
Here's the thing.
Very few people just starting out in any industry
have the foresight or the skills to negotiate a better
starting salary for themselves.
And more importantly, few people just starting out
are aware of just how easy it is to find comparative rates
for jobs that you're applying for on places like Glassdoor
or PayScale.
Without the proper research, we're already at a disadvantage
when it comes to negotiating our first salaries.
And combine that with how little leverage entry-level employees
often have, and most people end up
starting their first job or first few jobs
with a relatively uncompetitive salary.
And if we stay at that company for a long time
and are therefore building off of that initial not great
salary, that means we can be well into our career
and still earning behind what we could be standing
to earn in other places.
There's a reason why statistically people most often
realize their greatest increases in pay
when they change employers.
So forcing yourself to regularly compare
where you're at in your current job versus where it stands up
and competitive employers is incredibly important.
It is very easy to become complacent in your job,
especially if you've been there for a very long time.
But statistically, if you've been there
for a very long time, that's when
you are most vulnerable to being underpaid.
Don't let the trap of familiarity
prevent you from getting what you're worth.
And this is equally important when applying for jobs.
Never go into any interview or negotiation
without being very read up on what your actual value is
in the market.
And remember, it is illegal in many states for people
to ask what your current salary is.
But even if it's not, you should be basing it off
of the upper end of market averages.
Number seven is your retirement.
When you combine the retirement funds that many employers
provide to employees, like 401(k)s,
with the widespread availability of self-sought retirement
funds, IRAs, Roth IRAs, et cetera,
it becomes increasingly difficult to justify
the close-my-ears-and-wait approach that so many of us
have when we're starting to think about money long-term.
Yes, retirement is boring and scary to think about.
And it sort of feels like we're an entirely different person
in that far-off vision of ourselves.
But the truth is, with any luck, we'll all be old one day
and we will want that money.
And yes, it will very much be ourselves who want it.
And that old version of ourselves
is not going to be that different from who we are today
and that they'll want to live a good life without having
to worry too much about it.
And just like having a good credit score
that you monitor closely will open up
all kinds of opportunities for you financially,
having a sound retirement plan that you're actively
working towards means you will not be caught off-guard.
And of course, the amount that you'll
need to save for the retirement that you want
is going to vary totally person-to-person.
So we'll link you in the description
to a good calculator to use to figure out your retirement
plan, but not having one is not an option.
Number eight is what you pay in taxes.
For most of us, taxes are taken out of our paychecks,
so we don't really have to think about them
except that once a year when they actually get filed.
However, based on the exemptions that you claimed
when you started your job or last filed a W-4,
you may be over or underpaying your taxes each month,
which will affect you come tax time.
You could end up owing the IRS money
or you could be getting a big refund
check, which means your paychecks could
have been larger all along.
We'll link to the IRS withholding calculator
so you can figure out what you should ideally be paying
in taxes from each paycheck.
And if you're a freelancer and therefore don't
have your taxes taken out of your paycheck,
you should be filing them quarterly.
Which means yourself saving a certain portion
from each paycheck in order to be
able to pay income tax type, which can be very
difficult to do in practice--
I know that better than anyone.
But a good rule of thumb is to save 30% from every paycheck.
And we'll link you to a great calculator
to estimate your taxes if you're being paid on a 1099.
Those are just eight of the numbers that
are very important for getting a great idea of where
we stand financially and how to get where we want to go.
There are plenty more, and we'll talk about them on the channel.
But if you're a financial beginner and wondering
where to start, those are eight great places to look.
As always, guys, thank you for watching,
and don't forget to hit the Subscribe button
and to come back every Monday, Tuesday, and Thursday
for new and awesome videos.
Goodbye.