The 3 Money Numbers You Need to Know in 2020

When it comes to personal finance, some numbers matter more than others. Your income is important, for example, but also important is your financial health.

 There are certain numbers which can aid you in understanding how well you are converting your income into wealth. These also tell you about the effect of spending and taxes on your personal finance.

So, without further ado, here are the several calculations or numbers which can aid you in making better decisions.
Let’s start with…

Wealth Ratio

This is the ratio of your income against your wealth. In other words, this ratio tells how well (or how not so well) you have succeeded in converting your income into wealth over your lifetime. 

When it comes to your personal finance, the wealth ratio is important. That is because in the long term, it matters little how much you have earned over the years, but how much of that you have converted into wealth. This wealth can be in the form of investments, savings, and the like.

To get started, add up your life’s annual earnings, old tax returns and untaxed money.

Next, find out your Net Worth. This is found out by deducting the value of your liabilities from the value of your assets.

But how to find out your wealth ratio? Easy! Just divide your Net Worth by your Lifetime Income. This is in the form of a percentage.

There is no pass or fail here. Everyone will get a ratio, but you’ll often see that younger people have lower net worth than older people. This is because the latter have been investing and saving for decades. However, even for your younger people, knowing where you stand in terms of your Wealth Ratio can be enough to motivate them.

Now, we turn to….

Overhead Ratio

Your overhead ratio is your Net Income divided by your Needs, or things you absolutely need. If the ratio is high, it means you have problems making ends meet. If that is the case with you, this ratio also shows you the reason. Overhead ratio is useful when you are determining whether or not you afford a new loan repayment, or how much you should be saving for an emergency fund.

Needs are those expenses like food, shelter and clothing which cannot be ignored, delayed or postponed. At least, not without having to deal with serious consequences. We recommend that you keep 50% of your monthly income post-tax aside to deal with your Needs.

You may find that saving 50% is too much, but doing this gives you a ton of benefits. For instance, it frees up money that would have otherwise gone behind impulse purchases.

It is also advised that you follow the 50/30/20 budget; your personal financial shall be balanced between needs, wants and savings/debt repayments. 

And lastly, we come to…

Tax Rates

You pay taxes, right?

Just kidding. 

Of course you do! But did you know that your tax bracket does not show you the total amount paid in tax from your total income. Tax brackets show instead how much of your money the government taxes as tax. The tax bracket you have determines the real value of your deductions and investments. This means that a person in a low tax bracket won’t get a lot of value from write-offs. 

Your future tax bracket matters too. If you think that your bracket shall drop after you retire, it is a good idea to make deductible contributions to your individual retirement accounts since tax breaks from these contributions shall outweigh any taxes you’ll pay for future withdrawals of your retirement funds. But what if you expect your tax bracket to jump after retirement? It is better to park your money in non-deductible and tax-free contributions to your Employee Provident Fund. 

To stay in control of your financial life, keep a tab on these numbers.