When it comes to good money habits, you may have mastered some important ones already, like paying your bills on time, creating a budget that reflects your values and even negotiating a raise during your last performance review. But are you a bona fide financial rockstar?
If you can place a big check mark next to all seven of these major financial milestones, congrats—the answer is yes! If not, don’t worry. Use this list as motivation to keep improving, and you’ll reach rockstar status before you know it.
Financially successful people understand that it’s not if an unexpected bill will pop up, it’s when. And to keep it these surprises from derailing their budgets and money goals, they set aside cash in a distinct account and commit to leaving it there unless a true emergency—like job loss or a major accident—occurs.
“Think of an emergency savings fund like an insurance policy for your financial stability: You can’t predict the future, but you can better manage the impact emergencies have when you’ve saved for the unexpected,” says Laurie Samay, a Certified Financial Planner and investment analyst at Palisades Hudson Financial Group in Scarsdale, N.Y.
As for what’s considered “fully funded,” Samay recommends banking six months’ worth of living expenses. But if you care for dependents, are self-employed or work in an insecure industry, you may want to set aside more.
The old adage “what gets measured gets managed” succinctly summarizes why it’s important to know your personal financial stats. Financial rockstars can rattle off these numbers anytime—even though many fluctuate from month to month:
- Their monthly take-home pay
- Their ultimate retirement-savings target, and how much to save to meet it (Hint: See #3 for a good rule of thumb)
- Their debts and corresponding interest rates
- Their credit score
- Their bank account balance(s)
When it comes to preparing for the future, financial rockstars know one of the best ways to ensure you can live the life you want is to invest in tax-advantaged retirement accounts like 401(k)s—and not just enough to take advantage of their employer’s match (though that’s key!).
“[Each year you’re retired], you need about 60 to 80 percent of your annual pre-retirement income in order to maintain your lifestyle,” Samay says. “If you start at age 25, saving at least 10 percent of your gross (pre-tax) income will help you achieve this.”
Carrying debt that costs you money—in the form of interest charges—is perhaps the biggest barrier to wealth because it prevents you from moving forward in other areas of your financial life: It limits the amount of cash you could be putting toward regular savings, retirement and other investments, and makes it more challenging to maintain the credit score you need to qualify for competitive rates on car loans and mortgages.
What’s the rockstar’s strategy to zeroing out debt? Samay favors tackling balances in order of highest interest rate—by paying them off, executing a balance transfer or getting a personal loan—which saves you more money in the long run. However, Certified Financial Planner Jeff Rose, author of “Soldier of Finance,” prefers the “snowball method” for its motivational benefits: Pay off your smallest debt first, and progressively move on to bigger balances.
“Getting the smallest debt you have paid off super-fast works like an explosion of inspiration: You see that you can absolutely get out of debt and quickly achieve a piece of that goal, even if you just started on your debt-free journey,” Rose says.
Using credit cards to earn cash back or rewards can be a smart way to get paid for using credit, but payment timing is critical. Even if you avoid interest charges by paying your bill in full by the due date, you might not be benefitting from your good behavior if your balance is reported to the credit bureaus mid-cycle.
That’s because your debt-utilization ratio, or the amount of credit you use relative to what you have available, is the second-most important factor in the FICO score calculation, and typically shouldn’t exceed 30 percent.
The rockstar move: Make a payment when your cycle closes, which is about three weeks before the bill is due. That way, you’ll avoid interest charges, and your credit report will reflect a lower (or zero) balance.
Having your financial act together means only spending what’s feasible based on your income—regardless of a hot housing market or how amazing (and envy-worthy) your friend’s new reno looks. To keep your costs in check, aim to devote just 25 percent of your monthly take-home pay for housing, or 30 percent when you factor in related expenses like insurance, taxes and utilities.
“People who get up in the 40 to 50 percent range or higher start to find themselves in a place of being ‘house-poor,’” Rose says.
Half of a percent may not seem like much, but the Securities and Exchange Commission reports that an annual fee of that exact amount imposed by an investment firm could reduce a $100,000 portfolio by $10,000 over 20 years.
That’s why rockstars do their research and know exactly what an investment costs before fees take a bite out of their portfolio. Generally speaking, actively managed funds cost more than index funds; and buying or selling individual stocks typically involves trading fees, imposed when you buy and sell, which can range from a few dollars up.
Smart investing requires keeping an eye both on performance and on what you’re paying—and what that means for your bottom line.