In this article, we’re sharing six key metrics you can use to evaluate your financial health.
This year has been anything but calm for investors. Inflation, rising interest rates, and ongoing volatility have made it difficult to find a silver lining in financial markets.
Still, it can be helpful to take stock of your finances at year-end to make sure you’re still on track towards your financial goals. That way you can effectively prepare for the year ahead and make adjustments to your financial plan if necessary.
Just like with your physical health, there are certain vital stats that you can check to assess your financial health and well-being.
Here are six metrics to assess your financial health and well-being:
#1. Your Net Worth
Net worth is simply the sum of your assets minus the sum of your liabilities. If you’re making good choices when it comes to your finances, like saving, paying down debt, and sticking to your investment plan, your net worth will improve. This simple truth is why net worth is such an important measure of your overall financial health.
If you don’t know your net worth, there’s a simple way to calculate it and improve it over time.
First, tally up the value of all your assets—for example, your home and other property, investment accounts, and anything else you own that has financial value. Then do the same for any debts you owe, whether you have a mortgage, outstanding loans, or lingering credit card debt. The difference between these two numbers is your current net worth.
Next, identify the factors that are benefiting your net worth, as well as any areas that can be improved. For instance, perhaps you’re saving enough but you’re under-invested. Or maybe a financial setback depleted your savings. This exercise is to make you aware of any trends—positive or negative—in your financial habits that may be affecting your financial health.
Finally, choose one new habit to improve your net worth over the coming months. As an example, try automating your savings and investment account contributions. Or avoid stores that tend to trigger overspending, so you can focus on paying down credit card debt.
You may be surprised how quickly your financial health begins to improve by simply tracking your net worth, being aware of your financial habits, and making conscious decisions about your money.
#2. Your Credit Score
Your credit score is one of the most powerful financial tools you have available to you. A strong credit score can save you a substantial amount of money over your lifetime. On the other hand, a weak credit score can make anything from getting a credit card to buying a house challenging and expensive.
As a measure of your financial health, your credit score indicates how responsible you are with repaying and managing debts. It also determines how likely you are to qualify for a loan under the best terms.
Someone with a credit score greater than 800 will likely have no issues obtaining a loan with low interest rates. However, if your credit score is below 670, you may struggle to obtain any type of credit financing without collateral or very high interest rates.
To obtain a great credit score, be sure to make your debt payments on time and try to keep your credit utilization below 30% of what’s available to you. In addition, check your credit report at least annually to avoid setbacks due to identity theft or fraud.
#3. Your Debt-To-Income Ratio
Your debt-to-income ratio reveals how much of your monthly income goes towards paying off debt. This includes good and bad debt—for example, mortgage payments, student loans, and credit card debt. In general, the lower your debt-to-income ratio, the better your financial health.
Debt-to-income becomes increasingly important as you near retirement since you’ll need all available financial resources to support your lifestyle after you stop working. To get your debt-to-income ratio to a healthy level, make sure you’re diligent about paying down unnecessary debt.
Alternatively, you can lower your ratio by increasing your monthly income. However, depending on your circumstances, your income level may be harder to control.
#4. Your Emergency Fund
An emergency fund is just that—a way to cover unexpected financial setbacks, such as a sudden job loss, a medical bill that isn’t covered by insurance, or an unexpected home repair. It’s generally advised to have at least three to six months of living expenses set aside to cover these types of events. If you’re self-employed or your income is less predictable, you may want to have an even larger cash reserve set aside.
One benefit of an emergency fund is it allows you to recover more quickly from a financial setback. If you’re unprepared, taking on debt or dipping into retirement savings can undo years of progress towards your financial goals.
To build a cash reserve, first set your savings target. How much will you set aside each month or each paycheck for your emergency fund? Once you come up with this amount, set up automatic transfers from your primary checking or savings account to your designated cash account. You can also set this up via direct deposit if your employer allows it.
#5. Your Retirement Savings
Your retirement savings is an important metric of your financial health if you plan to stop working someday. As lifespans and healthcare expenses increase, having sufficient financial resources later in life is essential.
According to a 2020 TD Ameritrade report, nearly two-thirds of 40-somethings have less than $100,000 in retirement savings. Meanwhile, 28% of those in their sixties have less than $50,000. Compare this to the rule of thumb that you’ll need about 80% of your annual income in retirement to maintain your lifestyle, and it’s easy to see why so many people outlive their savings.
Indeed, the earlier you start saving for retirement, the better. That’s because you can let the stock market do most of the work for you.
However, if you’re behind on your retirement savings, it’s never too late to catch up. If you’re over 50 years old, the IRS allows you to make catch-up contributions to help bridge the gap.
#6. Your Financial Stress Level
Lastly, your financial stress level is a critical measure of your financial health. If your finances are keeping you up at night or affecting your physical health, you may need to make some changes.
This is where the true value of financial advice often comes into play. A trusted financial advisor can help you develop a long-term plan for your finances and proactively keep you on track towards your goals. Additionally, an advisor can help alleviate stress by saving you time, energy, and useless worry.
As a fiduciary financial advisor, Benchmark Wealth Management provides our clients with holistic financial planning and investment management solutions. We strive to make your life better by offering unmatched client care and attention.
If we can help you develop a long-term plan to improve your financial health, please don’t hesitate to get in touch. We’d love to hear from you.
About Rick
Richard W. Stout III is managing director of Benchmark Wealth Management, LLC, with 25 years of experience in the financial industry. He specializes in financial planning and asset management for individuals, families, and institutions seeking to build and monitor durable and sustainable plans for their financial futures. Rick is a Certified Financial Planner™ professional and holds the Accredited Investment Fiduciary® (AIF®) designation. He obtained his MBA from Rensselaer Polytechnic Institute and his BA in Economics and Anthropology from the University of Connecticut. Rick has earned a Master of Science degree in Personal Financial Planning from the College for Financial Planning. He has extensive background experience in lending, credit review and analysis, and real estate and partnership management. Learn more about Rick by connecting with him on LinkedIn.
About Thomas
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 20 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ professional. He holds the Master Planner Advanced StudiesSM, MPAS®, Certified Investment Management Analyst® (CIMA®), and Chartered Retirement Planning Counselor℠, CRPC® designations. Thomas earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
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