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By Linda Stern
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So, how are you doing? It used to be that you were OK if you earned the equivalent of your age in thousands, but success has become a lot costlier and more complicated since then. Here are some updated ways to measure your financial health.
• Check the averages: Median U.S. household income is $48,000, and if your family brings in $88,030, you're in the top quintile of households. If the members of your household are earning more than $157,176, you're in the top 5 percent. When it comes to those credit-card balances, you should try to underachieve: $10,000 is now about the average credit-card debt per household, according to cardtrak.com.
• Pretend you're a business: Denver financial adviser Charles Farrell evaluates clients' health with financial ratios that are similar to the ones used for companies, and he pegs it to their age, too. At 30, you should have your highest levels of debt (including mortgage, student loans and credit cards) to earnings, with total debt double your annual earnings. As you age, that figure should get smaller, and stay below 1:8. At the age of 45, debts should equal your annual salary. By retirement at 65, those debts should be zero, he suggests.
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You should also aim to be saving 12 percent of your income annually, and the savings you amass should exceed your annual income in your 30s, says Farrell. By the time you are 40, you should have 1.7 times your income stashed away for retirement, and by 50, aim for three times your earnings.
• Check cash flow: Lenders (at least the sensible ones) like to see borrowers keep their housing expenses—including mortgage payments, insurance and property taxes—to 28 percent of gross income. They also like to limit total debt payments (adding car and student loans and credit cards) to under 36 percent.
• Do the eat-and-sleep test: Too much math? The old saw about family finances holds that you can either eat well or sleep well—you can spend too much on luxuries and worry at night, or sleep soundly by living lean and saving more. If you're paying all your bills, managing the occasional treat and saving money without tossing and turning in terror about your bottom line, you're probably doing just fine. Or you're in denial.
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