Turn on the news and all you hear about is two things: Covid 19 and the economy. I’m no doctor, so you will never hear advice from me about your physical health. That said, your financial health is absolutely what I’m all about. This issue, let’s talk about some key indicators of your financial health. Some of these ideas will be familiar to you if you’ve been reading for a while. Nevertheless, these are the most important things to keep an eye on and check on a regular basis to see if you are in good financial health, so they are worth repeating!
The first and most easily accessible indicator of your financial health is your credit score, which can range from 300 to 850. This is a measure of your creditworthiness as determined by banks and other financial decision makers. Having a good credit score is important for so many reasons including, but not limited to, whether or not you will be approved for a loan or credit card and the interest rate you may receive. For example a credit score over 760 could earn you an interest rate of 3.212%, as opposed to 660 for 3.825%, which could save you thousands of dollars over the life of a loan (rates as of 3/24/2020, www.myfico.com). In addition, many employers these days are looking at your credit score and credit report when you apply for a job. It is being used as a measure of your dependability and trustworthiness. When you are moving and need to rent an apartment, these days almost every single landlord is going to run your credit report. Too low or too many delinquencies, and you just may find yourself having to pay twice the amount of security deposit or worse, losing out to someone with a higher credit score.
The great thing about tracking your credit score is there are multiple legitimate resources on the web to find your score, learn about improving your score, and implementing a plan to do such. A few resources I personally use are www.nerdwallet.com, a free service that updates your score monthly; www.experian.com, a paid service that will monitor your credit, and www.myfico.com, which is the score most lenders use for home loans. Tracking your score monthly will be sure your overall financial health is improving.
The next measure of financial health is your debt to income ratio. This is calculated by adding up all your monthly debt payments divided by your monthly income. For example, if you have two credit cards with a combined minimum monthly payment of $300 and your monthly income is $3,000, your debt to income ratio is 10%. Keeping this ratio under 36% is desirable for most lenders, especially when applying for a mortgage.
Next up, savings rate. How much of your disposable income are you saving? Is it 1%? 5%? 10%? 50%? Simply put, if my paycheck is $1,000 and I’m saving $50, my savings rate is 5%. Not bad! The idea here is to know what your by rate is and every time you get an increase in income, rather than spending that increase, try to save it. This avoids the nefarious “lifestyle creep” you may have heard of. Are you in a position where you feel like you can’t afford to save? To this I say, in the words of Tony Robbins: “If you can’t, you must. And if you must, you can.” Savings is one of those topics that folks can get really fired up about. If that is you, there are resources available on www. sobermoney.com.
Lastly, the granddaddy of all financial health indicators is your net worth. Simply put, this is everything you own minus everything you owe. The value of your home, savings, 401k, checking account, etc. minus your mortgage, car loan, credit card balances, student loans. This is one of those items we look at either semi-annually or annually. The reason being is for most folks, their retirement accounts are a big portion of their net worth. And with the volatility in the stock market these days, you could see some wild fluctuations day to day or week to week. Net worth is a marathon, not a sprint.
I recommend sitting down and getting a good base point for all of these measures. Then make a date with yourself to look at each at least twice a year. The exception being your credit score. It’s a smart financial move to monitor your credit score at least monthly, especially if you are working to improve it. Your financial health impacts so many areas of your life - I believe it’s worth the time it takes to see where you stand.
Stay safe, stay healthy