Financial health for millennials: 5-step ladder to a “rich” retirement.

by Jun 5, 2022Economy0 comments


Financial health is similar to physical health. If you don’t know your vital signs, it’s impossible to diagnose why you’re losing money or if you’re making enough.

Financial health is just as important as physical health. While general physical statistics and vital signs help medical professionals determine overall health, accountants require numbers to understand how to keep your financial health intact. Most illnesses come with clear symptoms that aid treatment and recovery. But with finances, it is often too late before an individual realizes this and develops prudence.

The current Covid-19 induced global recession is the best example of financial volatility with unstable markets and declining micro and macro economies. Therefore, it is essential to control spending, taxes, and savings to remain financially strong in difficult times. The first step is to understand how to calculate earnings as after-tax income. Expenses, retirement funds, net worth, and credit score are a few ways to divide your income and calculate your overall financial health.

Here are 5 ways to make sure you are aware and in good financial health.

Staying on top of your finances is not a rosy task. It’s an arduous and monotonous practice. But the rewards are long-term. A person who is in control of his or her financial health is rarely bogged down by rainy days and sudden financial slumps. Financial decisions cannot be impulsive and half-knowledgeable. Therefore, it is crucial for all of us to be well versed in some basic forms of accounting and bookkeeping to make sure we keep track of every penny, earned, invested, or spent.

1. Income and Expenses

A look at your last pay stub can give you a clear picture of your after-tax income. The next step is to divide your monthly and annual expenses as wisely as possible. The general rule to follow for budgeting is 50/20/30. Ideally, your major expenses cover more than 50 percent of after-tax income. The other 30 percent is generally taken up by vacations and dining out. This means that most millennial professionals are left with 20 percent of after-tax income to save.

Calculating income versus expenses allows you to make conscious purchasing decisions and also curb unnecessary spending.
In addition, dividing after-tax income by the number of hours worked helps you calculate how much you will have to work to buy a product for a given value. While this allows you to make conscious purchasing decisions, it also helps curb unnecessary spending. Food, housing, transportation, insurance, child care, and other responsibilities add up to basic expenses. However, 30 percent of income spent on vacations, shopping or other luxury items can be shifted back and forth along with 20 percent divided to accommodate investments and savings based on individual choices.

2. Lifetime income and net worth

Invested income, pension funds, perks and benefits, income accumulated as dividends or investment earnings, gifts received, and inheritances are some things that add up along with annual earnings to constitute lifetime income. Like after-tax income, debts, mortgages, loans, and credit card debt must be subtracted from lifetime income from the above earnings to arrive at net worth.

This means it is crucial to saving more. It is equally important to have an idea of the approximate lifetime income you are likely to earn. For this task, a friendly accountant or an online lifetime income calculator can give you an accurate idea. The next step is to save, invest or loosen your wallet, rest assured that you’re on the right track.

3. Retirement benefits and social security

To take advantage of 100 percent of Social Security benefits, you must take advantage of benefits at the right time. If you take advantage too early, you’ll end up settling for a reduced salary. Similarly, if you use them too late, i.e., after retirement age, you may not use the credits until you reach age 70.

A JP Morgan study gives an idea of what millennials can do to meet their retirement goals at 67 if they start earning at 25. It’s critical to consider estimated Social Security statement benefits to understand what to expect from Social Security. The U.S. government’s social security calculator gives an idea of what to expect and how much to save.

4. Saving for Retirement

It is crucial to plan for your retirement while you are still earning. Planning ahead for your savings and getting mortgages and credit card payments closed as soon as possible will help you prepare for retirement. A good credit score and timely payments on financial liabilities will ensure a comfortable life after retirement without any financial problems or challenges.

A good way to start getting a handle on your individual retirement finances after decades of working life is to calculate the average amount of monthly and annual expenses required. Once you do this, you will have an idea of what you will need when you retire. The next step is to try to close the gap as much as possible to ensure a good standard of living after retirement.

5. Credit Score

A good credit score makes you look good on credit applications. Your debt-to-income ratio is crucial to achieving the big things in life. Having a good credit score will allow you to look good in the numbers books. Calculate your monthly debt payments, rent payments, outstanding credit card payments, loans, etc. against your monthly income to determine your debt-to-income ratio.

In general, lenders consider a debt-to-income ratio of 36 percent or less to be good enough. Paying off some outstanding debt is a good idea if you are in the 36 to 50 percent ratio range. A good credit score also allows you to qualify for any new loans. This is helpful for upgrades you may be considering to improve your quality of life. You may be planning to send yourself or family members for higher education.

Managing a good balance between after-tax income and expenses is the first step toward good financial health. You need to be aware of and in control of your financial vitals. This includes a good credit score, retirement savings, and social security benefits after retirement. In addition, a decent amount of net worth and balancing after-tax income with expenses while you are still earning are also important indicators to ensure a healthy financial life.


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