Personal finances are complicated for most people to face. So, people avoid it.
It’s uncomfortable to examine our own lives and really investigate our expenses and debt.
As human beings, we can not and should not have our weaknesses exposed.
But, unfortunately, looking at our finances does precisely that! It brings out our vulnerability and financial insecurity.
You don’t need to be perfect in your finances to build wealth, but you need to start somewhere.
Understanding what the personal finance numbers mean is half the battle.
Get unbelievably good at these personal finance numbers, and over time, your wealth will increase.
Change your financial life by mastering these nine personal finance numbers.
If you are a military family, read the last two tips. We do this as a military family on the road to Financial Independence (FI).
1. Spousal Roth IRA
This is a must-have, especially if you are a single-income family.
Generally, you need earned income to contribute to a Roth IRA.
However, a spousal Roth IRA makes it possible for the stay-at-home parent to contribute to a Roth IRA in their own name. The couple must file taxes jointly with the working spouse.
The Roth IRA limit as of 2021 is $6,000. To max out the Roth IRA, it is a monthly contribution of $500, or you can put it in as a lump sum.
Does the non-working parent have a Roth IRA?
Retirement should be a priority and a part of your wealth-building plan.
Put both retirements first before anything else as if it was your mortgage/rent. It should be part of the monthly budget.
Open up a Roth IRA account with Vanguard due to low fees. If you need help on how to do it, you can call them, and a representative can help you through it.
The stay-at-home parent does not need their own income, but they do need their own money.
You also grow more wealth together faster by funding two retirements than just one.
Maxing out my Roth IRA was one of my stipulations when we became a single-income household.
So I have my own money, making me feel financially secure for my future despite my relationship with my husband.
2. Take-home pay
Take-home pay is the amount of money that hits your bank account and what you should budget your expenses on.
Do you know what your take-home pay is? This tells you how much you have to spend.
To increase your take-home pay, you can get side hustles, get a promotion or find a new company to work for.
What helps us the most is automatically putting the money into different checking accounts.
I calculated our monthly bill costs and the money we set aside to save and invest. This money is allocated to a checking account specifically for bills and investments.
And then, we receive the rest of the amount in a different checking account that we use to pay for our day-to-day life. This includes groceries, eating out, gas, and having fun money.
3. Monthly budget
Your monthly budget tells you what you are spending each month for housing, food, bills, and everything else you need to survive for the month.
Do you have a monthly budget? If not, make a monthly budget now and write down each expense.
Does your budget work, or are you going over it? It may take several months to get to a budget that works.
The goal with a budget is to find a good balance of paying your bills, having fun with the family, and meeting your goals.
Goals can include paying off debt, investing for retirement or kids college, or saving for vacations.
Meet with your partner every week or every month and discuss the budget. Together, assess if the budget is or is not working.
We do monthly budget meetings to see how we are doing.
I am the saver, so I maintain the budget, keep up with any financial changes, and inform my husband of any changes.
He is present for the meeting and does his part in sticking to the budget.
Related Post: Purpose of Budgeting and How to Use It to Your Advantage
Debt is money you owe to credit cards, car loans, mortgages, student loans, and personal loans.
Do you have any debt? If you are not sure, look it up. You need to be aware of all of your debt sooner than later.
You can organize the debt according to the total amount or the interest rate.
There are two ways to pay off debt. One way is the snowball effect, and the other way is the avalanche method.
The easiest way to get rid of the debt is to pay it off now with whatever method you choose.
Hate the debt enough to start tackling it.
Identify what your long-term goals are and dream about what you can do once the debt is gone.
Have a vision board of your goals and dreams so you can see what you are working towards.
Celebrate milestones along the way as you’re paying off debt.
Hold your partner accountable for their actions, and don’t accumulate more debt.
Earn extra money by doing side hustles.
Mr iFI got together in our mid-20s and accumulated our own debts. He had two car payments and credit card debt while I had student loans. Before getting married, we took care of our own debts, and six years later, we are still debt-free.
5. Emergency fund (and sinking funds)
An emergency fund is part of your savings fund. A sinking fund is allocated money with a specific title, such as $1000 for car repair fund or $2000 for home maintenance.
How much is your emergency fund?
Do you feel comfortable with it, or do you feel like it’s not enough?
Decide on a number that makes you feel secure. Same with your sinking funds.
And then stop hoarding money and put the money to work in other areas such as retirement accounts, 529s/UTMAs, or brokerage accounts.
Place your emergency fund and sinking funds away from your everyday checking accounts.
Out of sight, out of mind, and you won’t be tempted to use it.
Always make sure you have sinking funds for things you can predict, such as car repair, house repairs, vacations, or gift funds.
We keep our emergency fund and sinking funds in an online savings account, Barclays savings. It is user-friendly, and you can create multiple savings accounts with its own name and monetary goals.
The checking account that we regularly access for day-to-day life is our USAA account.
6. Savings rate
The savings rate is the percentage of the money you are saving compared to how much you are getting paid.
Do you know your savings rate? To calculate, add up all your yearly savings and divide it by your income.
Look at all of your expenses on your monthly budget.
Decide if there is an area that you can cut back on. If you find money, you can put the extra money into your investment accounts to increase wealth rather than spend it.
Every penny you spend loses value.
Every penny you save and invest grows exponentially the longer you don’t touch it!
Anytime you come across a pay raise, increase your retirement contribution even just by 1-2%.
Challenge yourself to increase your savings rate.
If your lifestyle feels uncomfortable after increasing it, then go back down and decrease it.
Our savings include contributions to brokerage accounts, retirement accounts, and education accounts.
Our current savings rate is 35%. It took years to find a good balance with living life now while saving.
7. Net worth
Net worth is the amount of money you have to your name.
What is your net worth? Calculate your net worth by totaling your assets and then minus your liabilities.
Assets are your savings, retirement accounts, brokerage accounts, education accounts, the value of your home and car, etc.
Liabilities are debt you owe, such as a mortgage, car loans, personal loans, student loans, credit card debt, etc.
Track this yearly to make sure that your net worth is slowly increasing.
Pick the same time each year to compare last year’s and the current year’s improvements. It will give you a good idea of how you are doing.
To increase your net worth, you need to get out of debt and stay out of bad debts.
Get your lifestyle in order and decide what your long-term goals are.
Automate your investments so that investing is a no-brainer.
We have automated all of our investments and savings for several years now, so investing is effortless.
Once you make the big decisions of where and how you should invest, all you have to do is set up automatic monthly contributions.
8. FI number
The FI (Financial Independence) number is the amount of net worth you need to have before saying you are financially independent and ready to retire.
Once you are financially independent, it means that you no longer need to work and can live off your net worth by taking out small contributions from it yearly.
Ideally, the money should last you your entire life without having to work again.
Do you know your FI number?
This is one of the most important personal finance numbers to know if you are on the journey to FI.
The most straightforward way to calculate this is to figure out your expenses once you are FI and multiply it by 25.
Since the FI world has hit the mainstream in recent years, many different calculators have been created. Still, I honestly find this way the easiest way.
Your expenses may be different when you choose to retire vs. when you are working towards FI.
For example, your mortgage may be paid off by the time your FI, and you won’t have a mortgage to worry about.
This dramatically decreases your expenses and the money you need.
One of the most significant and most concerning expenses, especially for people living in America, is healthcare costs.
Another concern for people is not having access to retirement accounts before 59.5 years old without incurring an early withdrawal penalty fee.
Therefore, you need to consider parking some of your money outside of retirement accounts so that you can access it early without penalty.
Our FI number is roughly 2,000,000. However, it’s not set in stone, and we don’t give too much focus to the number itself.
The meaning of FI has evolved for us the longer we are on the journey.
Our ultimate goal is to create a life we love right now while working towards FI.
9. Credit score
A credit score represents an individual’s creditworthiness.
The numbers are between 300-850.
The higher the number, the more likely the lender will give you money to borrow since it tells the lender that you will repay the loan on time.
Do you know your credit score? Check to see if your bank or credit card offers a free credit score for being a customer.
Credit Karma offers free credit scores, but you will need to sign up and provide information.
The goal is to have a high credit score.
You can increase your credit score by paying off your credit cards each month.
If you’re not able to, then at least pay the minimum balance on time.
Keep your credit use low and pay off your balance as fast as possible.
Keep old credit cards open.
We pay our credit cards off in full each month, and we keep our expenses relatively low.
In addition, we check our credit scores through Chase since we are both credit cardholders.
If you are a military family, go on and read the following two tips. If not, skip to “OK, What now?”
1. TSP contribution
The TSP is the government’s retirement savings and investment plan equivalent to the civilian sector’s 401k plans.
Suppose you came into the military before January 1, 2018. In that case, you have to sign up for TSP yourself via myPay.
If you came in after January 1, 2018, you were automatically signed up for TSP.
The maximum TSP contribution as of 2021 is $19,500.
Some people don’t even know if they were/are signed up for TSP, so check this information right away.
See how much you are contributing and if you qualify for a match, make sure you are getting the match.
Increase your TSP contributions during these times:
- Increase it slowly by even 1-2%. Set a reminder on your calendar to do this every January 1, April 1, July 1, and October 1. By the end of the year, you would increase your TSP contributions by 4%-8% without feeling it.
- When you get a pay increase every two years, increase by 1%.
- When you get a promotion, increase at least 1% (preferably more since these pay raises are usually greater than 1%).
- When the government decides to give the military a pay raise, put that percentage of increase back into your TSP instead. In 2021, the military received a 3% pay raise.
Pay yourself first with every pay raise instead of inflating your lifestyle.
Military pay raises are predictable.
It may take you only a few years to get to the maximum contribution if you keep increasing the TSP contributions consistently when all these different scenarios occur.
We currently contribute a small amount to our TSP.
Unfortunately, it is not where we want it to be due to life events like having children and moving from one country to another.
2. PCS (Permanent Change of Station) Fund
A PCS fund is money set aside specifically to assist with every PCS.
No matter how much the military covers the move, it still costs the military family money upfront.
Create a PCS sinking fund, decide how much should be in there, and put money aside for it.
During a PCS, eating out, replenishing household things, and redecorating your new home all costs money.
Once you use the PCS fund, pay it back once you receive entitlements from the move.
Our PCS fund is $5,000. However, every time we find out where we were PCSing to, we save more money on top of that.
As part of our wealth-building plan, we requested to IPCOT (In-Place, Consecutive Overseas Tour) here in Japan.
The less PCSing we do, the more money we save.
OK, What now?
Understanding these personal finance numbers and using them to your advantage increases your wealth.
Imagine what it feels like to be a millionaire after only 10-15 years of working towards it rather than working a typical 40-year career hoping to be a millionaire at the end of it.
Imagine having no debt and a healthy emergency fund…how much financial security that gives you.
Imagine how secure you feel about your own financial future 10-20 years from now because of what you do today.
These personal finance numbers are tools that apply to everyone, but not everyone uses them.
Some people avoid knowing their personal financial numbers are because of fear or pure ignorance.
Once we started our FI journey, we became aware of these tools. We heard about these personal finance numbers but didn’t actually use them until now.
As a result, it has accelerated our wealth even with our modest income.
Use these personal finance numbers as your tool to build wealth!
You can do it!