We all know we should see a doctor once a year for a health check-up. Much like your physical health, you should periodically check your financial health.
Our finances can make or break us in many cases, so being aware of our financial health is critical.
Looking at your personal finances can help you determine what and where you should make adjustments.
Here are 5 simple steps to evaluate and improve your financial health
Disclosure: this post contains affiliate links. Please read my affiliate disclaimer for more information.
Step 1 – Determine net worth
What is net worth anyway and how does it relate to my financial health?
It tells you whether as a whole you owe or own more.
Here’s how it’s calculated:
Net Worth = Everything you OWN – Everything you OWE
What you OWN might include:
- cash
- investments
- home and car (based on the value you could realistically sell it for today)
- collectibles
What you OWE might include outstanding balances on:
- student loan
- car loan
- credit card debt
- mortgage
- family loan
Annual income isn’t relevant as far as net worth goes. The point is to figure out what you currently have versus what you owe.
Once you add everything up, you might find that your net worth is negative (you owe more than you own). Don’t freak out. That’s okay and not uncommon.
Most of us start off in life owing more than we own. Between student debt, credit cards and a mortgage, it seems almost impossible to have a positive net worth (especially at a young age).
The point though is that you monitor your net worth over time. You should see it trending towards positive.
One great platform I use to track my net worth over time is Personal Capital.
I have been using Personal Capital for several years.
It’s a FREE service that allows you to sync and monitor all your financial accounts in one location.
They continually add new features which allow you to not only track your net-worth but also your portfolio, investments, and more. It’s similar to Mint but more detailed.
CLICK HERE to set up your FREE Personal Capital account.
Action Item – focus on increasing your net worth 5-10% each year as a baseline.
Step 2 – Determine debt-to-income ratio
While this may seem like a scary task, all we’re doing here is looking at your income and what you owe.
The key here is understanding how easy it is for you to make all your payments.
Are you carrying a comfortable amount of debt? Or are you struggling to cover your payments?
This one can be really scary so try not to scream.
Here’s how it’s calculated:
total monthly debts payments / total monthly after-tax income
Your monthly debt payments could include:
- mortgage
- car
- student loan
- credit card
This ratio is important for a number of reasons.
- the amount of debt you carry is a factor in your credit score. That means you might have a harder time getting a mortgage, credit cards, loans, etc.
- it helps you get a sense of whether your debt is under control. If you’re working with a ratio of 50%, then it might be time to buckle down and prioritize paying off debt.
If that’s the case, look into whether you can reduce your interest rates.
You may want to consider refinancing student loans so that you can save on interest. Lendkey
is a good option to look into.
I haven’t used it personally, but I really dig their mission and have friends who have happily used LendKey.
The coolest part about LendKey is that they partner with local credit unions to service your loans – so no big banks, only the small homegrown credit unions on Main Street.
It may allow you to save thousands of dollars, and cut down how long you are paying down your loans as well!
CLICK HERE to find out more about LendKey.
Action Item – maintain a debt-to-income ratio of 30% or less.
Step 3 – Check your credit score
What is a credit score anyway?
A credit score is a number that measures how financially responsible you are. It is used primarily by banks and other financial institutions to gauge your creditworthiness.
Why should you care?
- Checking your credit score is a proactive way of making sure you have not been the victim of identity theft. Any accounts listed that you didn’t open should be investigated immediately.
- A good score can save you a ton of money over a lifetime. Here are just a few examples:
- Lower interest rates on loans
- Lower car financing or leasing payments
- Access to better credit cards
- Better insurance rates (car, rental or housing insurance)
There are a number of ways to check your credit score online for FREE. One great platform I use is Transunion.
Once you create an account and fill out your personal information, you will receive your score and a report.
Your score will range anywhere between 300 and 900. You can use the chart below to get a sense of where you stand.
As a general guideline, you should aim to have a score of at least 700.
Most platforms also provide helpful information on what is affecting your score. If you’re not sure how to improve your credit score, HERE’s everything you need to know about it to save money.
Action item – check your credit score at least once a year and maintain a score of 700 or more.
Step 4 – Know where your money is going
You might have been told over and over again that you need a budget. My take on saving is a little different.
A budget is important and could do wonders for you, but personally, I don’t think it’s realistic for most of us.
According to a 2014 poll, only 30% of people are successful at budgeting.
That makes 70% unsuccessful…why?
Fluctuating bills, unexpected crises, major life changes – and the reality that most human brains are not primed to track 500 distinct transactions per month and tuck them into clear categories.
Besides, who has time for that? Amiright?!
While I think budgets aren’t realistic for most of us, I still believe it is important to look at where your money is going.
Here’s the quickest and easiest way to get that done:
- Create a Mint account. It’s FREE and automatically categorizes all your expenses
- At least once a month, log into your Mint account and have a look at what you spent money on
- Make adjustments as needed. Maybe you’re doing great with your spending but most of the time, adding and categorizing does help with managing. I’m guilty of spending too much on restaurants so my total each month serves as a good reality check. I might end up on a wild eating spree if this wasn’t part of my process.
The goal is to get a handle on where your money is going.
Once you have a good understanding of where your money is going, you can start making adjustments.
Action item – review your spending at least monthly and work towards cutting back on unnecessary expenses.
Step 5 – Invest and evaluate your strategy
Yes, that’s right. You should be investing if you aren’t already.
I can’t tell you everything you need to know about investing in this article, but I urge you to read a few of more in-depth pieces on the subject:
- How to start investing with less than $100 and ZERO overwhelm
- 6 powerful steps to make money investing for beginners
- How to invest in stocks: 3 No-brainer hacks for newbie investors
If the stock market sounds too intimidating for the time being, you can easily start with robo-advisors like Acorns.
Acorns is an app that automatically rounds up your purchases every time you buy something and invests the difference.
It’s one of the easiest ways to save and invest money without having to worry about it.
You don’t even notice it and all of a sudden you have an extra $1,000 – $2,000 in the bank.
Sign up for Acorns for FREE here.
The goal here is to ensure you’re investing and evaluating your investing strategy.
What does evaluating mean?
Both your current and long-term personal goals should be aligned with your financial goals. Here are a few things you should be thinking about:
- What’s your risk tolerance? If you have a long time before you expect to retire, you can afford to take on more risk. If you’re closer to retirement or maybe just more risk-averse, you may want to put money in safer investments like bonds.
- Have you maxed out on your tax-sheltered accounts? IRAs, 401(k)s, 529 plan, etc.
- Will you need cash in the near future? You need to factor in major financial events in your life and how soon you expect them to take place. If you’re going to need cash to buy that dream home, then it is not advisable you put that money in a risky investment.
Action item – make sure you are putting your money to work by investing it and evaluating your investing strategy against your current and long-term goals.
Final Words
If you don’t know where you want to go or what you want to achieve, then it doesn’t matter which path you take. You can’t get to where you want without knowing what it is you want.
The point is, you need to establish clear financial goals.
This is an important part of evaluating your financial health.
After all, how are you supposed to know where you stand and what progress you’ve made when you have no idea where you want to be.
My advice is to identify what you want to achieve in the short term and long term, and write those goals down.
Studies show that those who write goals down have a much higher success in achieving them.
These are just some of the quick steps you can take to get a pulse-check on your financial health and how you can work towards improving your financial health.
What are you doing to improve your financial health?
