Keeping track of your finances is equally worthwhile as ensuring your physical health is top-tier. When you have been observing proper money practices, it is normal for you to gauge how well you are doing. However, the opposite is also true, as bad money habits can cause anxiety, due to fear of needing services from debt settlement companies.
The two major factors that determine your financial health include the state and consistency or stability of your personal finances. Unfortunately, the monetary resources at your disposal can be affected by mortgages, student loans, and credit cards. Since financial health is not a static figure, it is vital to know how to measure your financial health to help establish whether you are making any improvements.
Aspects to Assess While Measuring Your Financial Health
Gauging financial health can be challenging, as the markers for success do not actually signify that someone is better at managing their money. For instance, high income may not be of the essence if you are spending every bit and working with companies. Living in a maisonette doesn’t mean much if you depend on your creditors for money to pay rent.
However, metrics such as net worth, debt-to-income ratio, and savings can help establish where you stand and give a clear picture of your financial situation. Below are the metrics to help in your financial assessment to determine whether you are making progress.
Your credit score gives an insight to lenders when reviewing your loan applications. It determines whether one is eligible for a loan depending on their ratings by the national credit agencies. Debt settlement from companies may have a negative impact on your credit report in the short term. However, this is not something you can self-assess.
Credit scores vary depending on the scoring system used. Fortunately, you can have an estimate of your score by using credit score tools that are available online. The ratings range from bad to excellent. Although a credit score is a far-fetched metric for your financial health, it points out how well or badly you use credit. Your credit score plays a significant part in the success of future loan applications.
Your net worth is the value of all your assets, such as your car, house, and investments, minus all your debts. It is a straightforward calculation that you can do at home. A steady rising net worth is a good sign while deteriorating net worth is a cause for concern.
While tracking your net worth is an easy yet effective way to gauge your financial health, it can also be blinding. For example, having a net worth of $1 million with $800,000 and $200,000 accounting for a house and car respectively.
Savings is the portion of your income that you set aside each month or weekly after covering your bills. For example, someone earning $2500 can save $500 after each payday. Normally, you are advised to save at least 20% of your total earnings and it is even better if you can save more.
However, avoid unreasonable savings like setting aside 50% of your income as doing this can negatively affect your quality of life, especially if you desire early retirement. Responsible saving gives you a certain sense of financial protection. Establish a balance in your savings for you to enjoy the present while observing a responsible saving culture.
Your retirement plan is among the metrics to analyze while measuring your financial health. It shows how well prepared you are for the future. You can use your age, income, financial situation, and desired retirement age in a retirement calculator to track your progress.
The tool will help you understand how much money you need to save monthly based on the period left before your retirement. Evaluating your retirement plan is also a good way to help you get back on track and manage your finances better.
Most of the time, people get caught up in living life and forget the importance of conducting a financial health assessment. It is essential to learn how to measure your financial health to help you put in place measures that will help you arrive at your financial destination.