Four Numbers

Kristine Hayes

IT’S PROBABLY NO surprise I gravitated toward a career in the sciences: I love compiling data. My master’s thesis was 150 pages of charts, graphs and tables that summarized two years’ worth of research.

When it comes to my finances, I’m equally compelled to gather data. I do so, in part, to create a set of documents that are more tangible than the pixels that make up the account balances on my computer screen. I also use the information to gauge my progress toward achieving financial independence. Over the past few years, I’ve found four calculations especially useful:

1. Net worth. I calculate my net worth—my assets minus any debts—at the beginning of each calendar year. Over the last four years, I’ve enjoyed seeing a sizable increase in the bottom line: My net worth has grown by over $150,000 to nearly $400,000. The growth of my various account balances motivates me to limit my spending and increase the sum I save.

2. Retirement savings. In his book Your Money Ratios, Charles Farrell suggests using a capital-to-income (CIR) ratio to determine if you’re on track for retirement. Farrell’s ratios are based on the assumption that, if you have savings equal to 12 times your gross income at age 65 and you’re eligible for Social Security, you should be able to generate enough retirement income to maintain your standard of living after you quit the workforce.

Using Farrell’s CIR equation, I recently calculated my own ratio based on my income, age and total account balances. Since I have no debt, I divided my current savings ($397,000) by my gross salary ($68,000) to arrive at a ratio of 5.8. Farrell suggests a ratio of 5.2 at age 50, and 7.1 at age 55, so I fall right where I need to be as I approach my 51st birthday.

3. Tipping point. Until I was in my early 40s, I didn’t contribute any of my own money to a retirement account. Instead, I relied entirely on the automatic contribution my employer made on my behalf—an amount equal to 10% of my gross salary.

When I decided to try and retire before age 65, I started contributing an increasingly large percentage of my income to a pretax retirement account. In 2010, I began saving $100 a month. By 2014, I’d increased my contribution to $500 a month. This year, I’m socking away $2,000 a month. Combined with my employer contribution, I’m now adding just over $2,500 each month to my primary retirement accounts.

In 2017, the combined contributions to my main retirement account totaled $24,500. The earnings in that account added an additional $47,000 to my balance. I realized I’d reached the tipping point, the moment when my earnings were finally exceeding the amount of my own contributions.

4. Housing expenses. Having recently added a second dog to my household, I decided to move to a two-bedroom apartment to give all of us a bit more room to move around. A general rule of thumb is that housing expenses shouldn’t exceed 30% of total income. Even with a $150 increase in my rent, my $1,300-a-month expenditure still falls within this range.

My current plan is to purchase a home before I enter fulltime retirement. By keeping my housing expenses in check for the next few years, I should be able to save enough to make a sizable down payment on a modestly-priced home.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Oregon. Her previous articles include My Five MistakesFueling the Fire and Long Story.

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