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Are you financially healthy? How do you measure your personal financial health? Find out how you can measure your financial health and how to improve it in this article.
What Is Personal Financial Health?
Personal financial health refers to the state of an individual’s finances. You can improve your personal financial health by learning more about personal finance and adopting positive financial behaviors.
The Consumer Financial Protection Bureau did a study in 2015 to determine what financial health (or financial well-being) means to people in the US. It found that the 4 elements of financial health are:
- Control over your day-to-day, month-to-month finances
- Capacity to absorb a financial shock
- Financial freedom to make choices to enjoy life
- On track to meet your financial goals
These 4 elements focus on security and freedom of choice in the present and future. To gain a better understanding of your financial health, it’s helpful to evaluate your current financial situation.
How To Measure Your Financial Health
Because your financial health is based on many aspects of your financial situation, you have to evaluate it in several ways to get the full picture. Below are a few indicators of financial health for you to use as a benchmark of your money management, debt and financial goals. You’ll also find a couple easy-to-use financial calculators to help you do a personal financial health check.
1. Debt-to-income ratio
Your debt-to-income ratio (DTI) is your monthly debts divided by your gross monthly income x 100. It can also be calculated on an annual basis. There is a rule of thumb that states that your debt-to-income ratio should not exceed 40%. However, you can calculate your current DTI with our debt-to-income ratio calculator below and work over time to lower it by paying off debt and increasing your income.
This is one metric that creditors, including mortgage lenders, use to determine if they should approve you for a line of credit.
2. Savings Rate
An individual’s savings rate is the percentage of money leftover after taxes and other expenses. Your savings rate is vital to your financial health as it has to do with how you are able to plan for the future, like retirement, and plan for the unexpected. Here’s how you calculate your savings rate:
Savings Rate Percentage = (Take Home Pay – Expenses)/Take Home Pay x 100
For example, if someone’s annual take home pay is $50,000 and they save $10,000, then their savings rate is 20%. According to Statista, the average personal savings rate in the US in 2019 was 7.6%.
Instead of calculating it yourself, simply use our savings rate calculator:
Take note of your current savings rate so you can measure it later as you work to increase it.
3. Emergency Fund
Having an emergency fund can prevent you from going into debt and help you avoid extra stress when the unexpected happens. It’s a clear measure of your financial health based on your “capacity to absorb a financial shock.” Your emergency fund should be kept separate from your other savings and only used in case of emergencies.
Most experts agree that you should save enough to cover 3-6 months of regular expenses if you were to lose all income. Try our emergency fund calculator to see how much you should aim to save:
Emergency Fund Calculator
Do you currently have an emergency fund? Is it separate from your other savings? Keeping your emergency fund separate from other savings will help prevent confusion and spending on non-emergencies. The ideal place to keep your emergency fund is a high-yield savings account that allows you to quickly withdraw your money if necessary. One option is CIT Bank that offers competitive interest rates, so your emergency fund grows faster than if you had it in your regular savings account.
4. Net Worth
Your net worth is a metric to evaluate your financial progress over time to help you reach your goals. Tracking your net worth helps to identify where you can improve and is an important indicator of your personal financial health. Here is how you calculate your net worth:
Net Worth = What You Own (Assets) – What You Owe (Liabilities)
For most people, this calculation is complicated because of having multiple assets and debts. Many people have a negative net worth, which is okay as long as you are making progress toward increasing it. Learn more about this important aspect of financial health and get our Net Worth Tracker Spreadsheet in our article.
5. Credit Scores
Your credit score is not something you can calculate yourself, unlike the rest of the ways to measure your financial health. It also is not as vital as the other indicators, as some people do not need to rely on their credit. However, for most of us we will need a mortgage to buy a house and other lines of credit to live our lives so our credit scores are important.
The 2 main credit scoring models are FICO and VantageScore. Creditors use these scores, as well as customized credit scores, to determine your creditworthiness.
You can get your FICO credit score for free from Experian. It offers access to your Experian credit report and includes credit monitoring and alerts. Experian Boost also enables you to improve your credit score by adding payments that are left out of your credit history, like cell phone, utility bills and even Netflix, to your Experian credit report. The best part is that it’s free!
You can get your VantageScore credit scores from Credit Karma for free. Credit Karma also provides insights into your credit scores and how you can improve them as well as credit monitoring so you will receive alerts when there is a change to your credit reports. They also provide personalized recommendations for credit cards and loans depending on your credit score.
Since your credit scores are a major part of being approved for a credit card, mortgage or other types of loans, it’s a factor in your personal financial health. Learn more about improving your FICO credit score in our article.
Check out our credit card guide to find a card suited to your credit and to learn more about managing your credit.
Improving Your Financial Health
Now that you know the many ways to evaluate your financial health, let’s look at how you can improve it.
The foundation of your personal finances is how you are actually spending your money. Do you know where your money goes?
To find out, log all of your expenses for the last month or 2 and categorize them. You can use general categories, like needs and wants, or more specific ones, like food, housing, entertainment, etc.
Then decide on a budgeting strategy. Learn about simple budgeting strategies in our article. Or take on a budgeting strategy that is proven to enable people to save more money, the zero-based budgeting method. Understanding your spending habits and giving every dollar of income a purpose will actually lead to “financial freedom to make choices to enjoy life.” Learn more in our article, Make A Zero-Based Budget & Save 18% More Money.
Making a budget and including the dates of recurring bills, such as rent/mortgage, electric, phone, etc., will also help with organization. It can also give you greater “control over your day-to-day, month-to-month finances,” one of the 4 elements of financial well-being.
Set Financial Goals
The last element of financial well-being according to that survey is “on track to meet your financial goals.” But you can’t be on track unless you set your financial goals! Set goals to save more money or pay off debt and then follow through.
Try setting both short and long-term financial goals. To make sure they are attainable, use the SMART goals method. Be sure to check back on your goals often to see if you’re on track and measure your progress.
Schedule Regular Personal Financial Health Checks
What’s the point of measuring your personal financial health if you don’t see the progress? We recommend saving the link to this article in a recurring calendar reminder so you can keep an eye on your financial progress. Also be sure to save the metrics you calculated with the date each time you do a personal financial health check.
How often should you check up on your financial health? It depends on your lifestyle and habits, so pick times that will work for you. We recommend anywhere from checking each quarter year to every 6 months.
Remember that you can attain financial freedom, whatever that may mean to you, and reach your financial goals. Start making progress today!
Financial freedom begins with good habits.Rebecca & Tiago, theloadedpig.com