Personal finances can either make or break you.
No matter how much money you're making at this point, having an awareness of where you stand financially is essential. A high salary means little if you're spending every penny. Such poor spending habits typically start from harmless small expenses that eventually turn into uncontrollable overspending issues.
That said, a routine check of one's financial health is as important as a physical health check-up. Just like tracking your progress at the gym, you pretty much want to ensure that you are staying financially fit. It's worth noting that many symptoms of ailing finances go unnoticed because not everyone knows and understands them.
We've highlighted six indicators to help you keep your financial health in check. The more equipped you are about the factors that affect your finances, the better you'll be able to spot and address any problem.
Table of Contents
- 1 The Importance of Financial Health Check-Ups
- 2 How To Keep Your Financial Health In Check?
- 3 What Can You Do To Build Up Your Financial Health?
- 4 Final Thoughts
The Importance of Financial Health Check-Ups
Financial health is basically the condition of your personal finances and financial affairs. It determines how financially secure you are in the present and when considering the future. Several factors determine your financial health, but they are all anchored to your financial decision, habits, and attitude.
That means every little decision you make can significantly affect your financial health. And as much as you want your financial move to be in your best interest, there might be instances that they won't work well as you intended. This is where financial health check-ups come into play.
By checking your financial health now and then, you can assess whether you're making improvements in your finances. If not, you can make adjustments before they become more deteriorating. A financial health check-up can help you keep on track and give you peace of mind in the end.
How To Keep Your Financial Health In Check?
Determining the condition of your financial health can be challenging. It doesn't revolve around a single indicator, such as the amount of income you're making or carrying debt loads. There are other factors that you have to take into account. Just like undergoing a physical exam, a financial check-up requires a comprehensive series of evaluations.
But for your reference, here are six indicators that will help you keep your financial health in check:
Check Your Credit Score
One of the essential indicators of your financial health is your credit score. It is a three-digit number that determines your progress towards monetary goals. Your credit score will be typically lower if you default on credit payments, mortgage costs, premiums on loans, and others. A low credit score may indicate that your financial condition is unhealthy.
There are different scoring systems for credit scores, but the FICO score is the most widely used. Basically, your FICO score can range from 300 to 850, and the higher the number is, the more you can unlock many savings and benefits. It's worth noting that a credit score isn't enough to gauge your financial health, but it does reveal how well you're using credit.
Evaluate Your Net Worth
Your net worth is a good indicator of your financial health as it provides a snapshot of your current financial situation. Essentially, your net worth is the total amount of all your assets less than your liabilities. You have a positive net worth if what you own is greater than what you owe. But if it's the other way around, you have a negative net worth.
There is no specific figure of net worth that you should be striving for. However, calculating it from time to time helps you keep your financial health in check. It can serve as a wake-up call if your finances are off-track, making you more mindful of your financial decisions and goals. Consider your net worth as a progress report that you want to see increasing over time.
Determine Your Savings Rate
Your savings rate is the portion of your income that you save every month. It can be allocated for an investment and emergency, a major purchase, or other financial goals you want to achieve. The ideal rate for savings is at least 20% of your income. But if you can save more than that, the better off you'll be.
Remember that your savings amount tells you how much you could spend towards a certain financial goal. It also determines how long you could afford to get by if an unexpected financial emergency comes. Thus, a high saving rate gives you financial security and wonderful peace of mind.
Identify Your Debt-To-Income (DTI) Ratio
Another way to check your financial health is to identify your debt-to-income ratio. Typically, it's the percentage of your income that goes towards paying your monthly debts. You can calculate it by counting up all your monthly debt repayments and divide them by your gross income.
A low DTI ratio shows a good balance between your debts and income, whereas a high one indicates that you may have too many debt loads for your income. Nonetheless, your debts are considered manageable if your DTI ratio is 30% or below. Bear in mind that keeping your debt at a manageable level is one of the starting points of good financial health.
Assess Your Cash Flow
Your personal cash flow is your income subtracted by your expenses over a certain period, usually a month. Much like in business, cash flow is the life force of your personal finances, and it can either be positive and negative. In a nutshell, positive cash flow can cover all expenses, while a negative one can get you into debt.
By assessing your cash flow, you will know how much money is coming in, going out, and staying with you. It can help you understand whether you're spending more or less than you make. In effect, you'll be able to evaluate certain financial decisions. But note that cash flow is just one tool and doesn't assess your overall financial health.
Review Your Retirement Fund
Retirement might be a distant concept, but it's an inevitable subject. Your retirement fund is another indicator of how prepared you are for the future. Thus, as with any other aspect of personal finances, it's important to review your retirement fund. Keep in mind that protecting your financial future is an essential component of your financial health.
What Can You Do To Build Up Your Financial Health?
It is not enough to know where you stand financially. You have to make ways to maintain or improve your financial health. It's worthy to note that there is no one-size-fits-all formula when building up your financial health. It depends on your current financial standing, financial goals, and financial habits.
Nevertheless, below are some of the steps you can do to build it up.
- Spend less than what you're making.
- Create a flexible budget and stick to it.
- Boost and automate your savings plan.
- Prioritize paying down debts if you have any.
- Pay all your bills on time.
- Put more money on your retirement fund.
- Cultivate a healthy financial mindset.
Your financial health is as important as your physical health. It's one of the keys to leading a happy and successful life. To be financially healthy doesn't necessarily mean you have to be rich and earn a six-figure income.
It's a matter of confidently meeting both your financial goals and financial uncertainties. But note that good financial health isn't something you can achieve overnight. It may take some time, effort, and discipline.