Did you know that taking care of your financial health can be as important as taking care of your physical health? Without a routine financial check you may overlook some warning signs that could turn out to be dangerous in the future. Good finances are the key to leading a happy and healthy life and this makes it necessary to measure one’s financial health from time to time.
Key steps to determine your financial health:
- One of the first things to do is to understand your net worth. This means knowing where exactly you stand financially; this is possible when you take into account your assets’ value and deduct the liabilities. While you can use some handy apps to calculate this, you can also determine it easily when you consider what you own, like a house, car, and investments, and subtract what you owe as debt like credit card payments, home loans, etc.
- You must then consider the debt-to-income ratio. This is done by measuring the amount you pay for debt payments and then dividing this by your income. This calculation is valuable because it tells you whether you have the debts in check. For instance, when the debt-to-income ratio is 50%, you should be worried. Moreover, this ration is a key parameter in credit scores and when you have a high ratio; lenders are reluctant to offer you loans until you repay the debts.
- Determining the savings rate is another way to control your finances. What you save each month will indicate your savings rate and you may use your net or gross income for calculating this. Ideally, you should save 20% at least of what you earn and if the percentage is more; it is even better. However, you must ensure that in an effort to save more, you do not compromise on your personal happiness and quality of life.
- The credit score is determined by credit agencies to determine how creditworthy you are. Unlike the above-two factors, this cannot be measured by oneself. You can however use many free credit score tools available online to get your scores. While the credit score does not indicate your financial health perfectly it tells you how you use the credit. You will need an impressive rating to be considered for loan applications.
- Calculating your retirement fund is another step that will show you whether you are indeed prepared for the days ahead. For this, you may use a calculator online and type in relevant information like your age, salary, desired retirement age, etc and the tool will inform you about how much you should save every month to retire comfortably. Another advantage of calculating this is to compare the retirement savings with amounts that you should have ideally saved at each age.
To find out about your financial health, you will obviously need to calculate your income because this has the biggest impact on one’s quality of life. You have to see whether this income has been increasing annually by at least 5% to cope with the inflation. An understanding of financial health, therefore, involves a study of many metrics because no single parameter can reveal everything.