5 Ways to Check Your Financial Health

5 WAYS TO MEASURE YOUR GENERAL FINANCIAL HEALTH

Personal finance measures can help give you a better general understanding of your current financial wellness and track your progress over time.

Emergency Fund

We generally recommend that you have 3 to 6 months’ worth of nondiscretionary monthly expenses (e.g. mortgage/rent, insurance, utilities, groceries, etc.) held as liquid assets, such as in cash, savings, or a money market account. The location should allow the funds to be readily accessible but not easy enough to access that you’re tempted to spend it on non-emergency expenses. These funds are intended to help provide a sufficient cushion in case of unexpected events or needed repairs.

For a one-income household, it's better to lean toward the 6-month mark. For a tw-income household, from two different employers, the 3-month amount is a good target.

Housing-to-Income Ratio

This ratio can help house-buyers know how much house they can afford. It’s generally advisable not to go over 28% of your gross pay.

How to measure:

Start by adding the following monthly amounts.

• Mortgage principal and interest (or rent)

• Property taxes

• Home insurance

• Utilities cost

• HOA fees

 Then take this sum and divide by your monthly gross income. Multiply by 100 to get the % amount.

Debt-to-Income Ratio

The debt-to-income ratio includes all your debt payments, such as car loans, student loans, credit card payments, etc. in addition to your housing debt. Lenders will use this ratio to help determine loan eligibility, and it’s generally advisable not to be higher than 36%. Aim for this measure to move lower over time.

*If you pay off your credit card(s) each month (kudos to you!), then consider the debt amount $0 for this measure.

How to measure: Add all your monthly debt payments, and then divide by your monthly gross income. Multiply by 100 to get the % amount.

Debt-to-Assets Ratio

This ratio measures the amount of your assets that creditors own, and it decreases as you repay your debts. The debt-to-assets ratio is usually highest with younger people and decreases with age, as people pay down their debts. The lower your ratio as you near retirement, the better!

How to measure: Take your total amount of debt and divide by your total amount of assets. Multiply by 100 to get the % amount.

Savings Ratio

The savings ratio is designed to show how much money you’re saving over a period of time. It’s the amount of your income that you’re setting aside for retirement or other long-term goals. This ratio factors in savings from all sources – employer-sponsored retirement plans, traditional IRAs, Roth IRAs, taxable accounts, etc. Don't include savings in or intended for an emergency fund, college, a new home, or a vacation. In general, a saving rate of 10% - 20% is ideal, but if that amount is too high, try starting with a lower amount such as 5% and aim to increase the amount as you can afford to. The power of compounding can help your savings grow, and the more time it has to grow, the better.

How to measure: Add the amount you put into savings each month plus the monthly $ amount of any employer match. Then divide this sum by your monthly gross income.

If you would like to talk more about tracking your financial progress, or see how these measures fit into your bigger financial picture and goals, please contact us!