How to Monitor Your Financial Health
4 min read •
30 sec brief
Having a good sense of your financial health requires pulling together a bunch of different data points to see your overall big picture. There’s the money you’ve got: money you’ve saved in bank accounts and the money you’ve invested for retirement or other long-term goals and if you are a homeowner, your equity. On the…
Having a good sense of your financial health requires pulling together a bunch of different data points to see your overall big picture.
There’s the money you’ve got: money you’ve saved in bank accounts and the money you’ve invested for retirement or other long-term goals and if you are a homeowner, your equity. On the other side of your personal balance sheet is the money you owe: the unpaid balance on your credit cards, the student loans you’re still dealing with, maybe a car loan (or two), and the remaining balance on a mortgage.
A popular way to measure financial health is to calculate your net worth: subtract the balances of all the money you owe (liabilities in financial jargon) from all your assets: the savings and investment accounts and the equity in a property, such as a home.
If you have a thing for spreadsheets you can keep track of your net worth. Or you can let an app do the heavy lifting. Fintech services such personalcapital.com offer free “net worth” tracking. If you agree to link your financial records, you are just a few clicks away from seeing an integrated big picture of your assets and liabilities that are updated daily. Or you can use a simple net worth calculator (NerdWallet and Intuit have them) to get a snapshot of where you’re at.
The younger you are, the more likely you are to have a small or negative net worth. That’s to be expected as you’re just getting rolling and might have student loans, a car loan and perhaps a large mortgage balance on the liability side of your financial life.
If you want to focus on net worth as a way to monitor your financial health, your goal should be that over time you see your net worth improving: your assets are growing and your loan balances are decreasing.
There are also some ways to take a DIY snapshot of your progress:
- Compute your overall savings rate. Add up how much you are contributing each year to retirement accounts, any other investment accounts and bank savings accounts. Divide this by your after-tax (take-home) pay. That’s your savings rate. Financial advisors recommend aiming to save 15% of your income. Not there yet? Okay, aim to increase your savings rate a bit each month, quarter or year.
- Track if you are hitting retirement milestones. There are all sorts of ways to compute if you’re on track to glide into retirement with enough money saved up to live comfortably. Some of those calculations get painfully deep in the weeds. A solid rule of thumb you can use to easily monitor your progress is to check how much of your current annual income you have saved for retirement. Fidelity’s rule of thumb rule is to aim to have 1x your salary saved at age 30, 3x by age 40, 6x by age 50 and to hit age 67 with 10x. (Those are just guidelines, for a clearer personalized estimate you might want to hire a financial planner to help you run the numbers.)
- Monitor your total debt load. There is no single magic number for how much debt is too much, but you can learn plenty from mortgage lenders. As a general rule, you are deemed to be in solid financial shape if your total monthly debt payments (including a mortgage you’re applying for) is no more than 36% of your gross monthly income. Lenders will consider mortgages for people with higher debt-to-income levels (DTI), but working to whittle your DTI to this level (and ultimately much lower as you near retirement) is a sign your financial health is improving.
- Check your credit scores. As you likely know all too well, your credit scores can play a big part in your financial life. They are used to determine if you are eligible for loans and the terms you will be offered. Your credit score is a snapshot of your financial health. Credit scores calculated by FICO are the industry standard. A FICO credit score ranges from 300 to 850. A score over 740 or so is considered very strong. The good news is that banks and credit card issuers are increasingly offering you free looks at your FICO credit scores if you log-in. That makes it easy to track your credit score.
Ready to get started?
See Why Lively is the #1 Rated HSA Provider