5 quick checks to assess your financial health
What's the story
Evaluating personal financial health is extremely important to keep yourself stable and prepared for the future. By regularly assessing your financial situation, you can make informed decisions as well as identify areas that need your attention. Here are five quick checks to evaluate your financial health, mainly focusing on key aspects such as savings, debt, and spending habits.
Savings check
Assess your savings rate
One of the first steps of evaluating financial health is checking your savings rate. Ideally, you should be saving at least 20% of your income every month. This includes contributions to retirement accounts, emergency funds, and other savings goals. If you're not hitting this benchmark, try reviewing your budget to find areas where you can cut expenses or increase income.
Debt analysis
Evaluate debt-to-income ratio
Your debt-to-income ratio is also a crucial indicator of financial health. You can calculate this by dividing total monthly debt payments by gross monthly income. Ideally, a ratio below 36% is considered healthy, showing you are mindful of your debt levels in proportion to your income. If the ratio crosses this mark, it might be time to look into lowering debt or increasing income.
Expense audit
Review monthly expenses
Conducting a thorough review of monthly expenses helps identify unnecessary spending that could be redirected towards savings or debt repayment. Categorize expenses into needs versus wants, and assess if adjustments are needed. Tracking spending over several months provides insights into patterns that may require changes for better financial management.
Emergency preparedness
Check emergency fund status
Having a healthy emergency fund is critical to handle unexpected expenses without derailing long-term financial goals. Ideally, you should have an emergency fund that covers three to six months' living expenses. Keep track of the status of this fund regularly, and contribute to it when necessary, to ensure it remains sufficient in case of unexpected circumstances.
Credit health
Monitor credit score regularly
Regular monitoring of a credit score not only gives you an idea about your overall credit health, but also influences your ability to borrow in the future. A good credit score usually lies between 670 and 739 on most scales, but the higher the better when it comes to applying for loans with better terms or interests. Pay your bills on time and keep credit utilization in check to maintain/improve your score over time.