You probably know that you have to keep healthy to live the kind of life you’ve planned out for yourself, but do you know that you must also stay healthy financially? Financial wellness goes beyond your income, net worth, and credit score.
It is the totality of checks that ensures you’re less financially stressed, are doing all that is necessary to live within your means, are keeping a sufficient emergency fund, and are well-positioned to meet your future financial goals.
Without making it sound so grandiose, financial wellness is similar to visiting the doctor regularly for medical checkups. The result of these checkups helps you adjust your life.
Most companies that have their employees at heart make financial wellness programs available to them. But as is not always the case, you may need to determine your financial wellness yourself.
It is not such a difficult task, and some tools can make this seem like a walk in the park. So, in this article, we’ll show you how to evaluate your financial health in five steps.
These steps are as follows:
1. Run a test to know your net worth.
2. Know the ratio of your debt to income.
3. Check if you’re living within your means.
4. Maintain emergency savings.
5. Ensure you’re working to meet your future financial goals.
Run a Test to Know Your Net Worth
This is like checking your body temperature with a thermometer to know if you’re under the weather. It is the first step to assessing your financial health. Net worth is a quick way to know where you stand financially.
To check your net worth, you simply take down the value of all your assets and subtract your liabilities from them. You can’t tell your assets from your liabilities?
Assets are valuable things you own, such as your home, car, and investments. On the other hand, Liabilities are the things you owe, such as student loans, mortgage, and credit card debt.
List the total monetary values of these items and subtract the liabilities from the assets. If this proves to be a difficult task, apps like Net Worth Spreadsheet can help you calculate your net worth with ease.
You’re doing just fine if the result of this test is positive. It is also okay if you have a negative net worth now. It is important to note down the value of your net worth today and track it regularly.
Know the Ratio of Your Debt to Income
Now that you know your net worth, it’s time to take a closer look at your income and weigh it against your debts. Knowing the ratio of your debt to income helps you know whether you’re in control of your debt.
To calculate your debt-to-income ratio, take note of the total amount of dollars you pay in debt, and divide it by your gross income, which is income before tax and other deductions. The result of this arithmetic in percentage is your debt to ratio.
For example, if your total monthly debt, including car loan, student loan, and mortgage total $1,850, and your gross income is $5,500, your debt-to-income ratio is $1,850/$5,500, which is equal to 0.34 or 34 percent. This is fair enough because most lenders recommend that you have a debt-to-income ratio of 30 percent.
A debt-to-income ratio of 20 percent, however, is ideal for your financial wellness. A low debt-to-income ratio not only shows that you are in control of your debt but also grants you a good credit score rating. You can get new credit easily with a low debt-to-income ratio. Once your debt-to-income ratio scales to 50 percent, know that you are not financially healthy.
Check if You’re Living Within Your Means
It is very easy to crave the life of celebrities and give yourself reasons to live like one but at the time, do you have the means to live that life? You may be living the life already without knowing. Therefore it is vital to examine your expenses.
This is a vital activity for financial wellness because living beyond your means can make you accumulate debt. On the other hand, living below your means can help you save enough to meet your goals.
To check if you’re living within your means, go through your bank and credit card statements and record your expenses on a worksheet. Mint budget tracker and planner can help you import your bank transactions and categorize them so that you can see your spending patterns and trends. It is also wise to add huge expenses like vacations that don’t occur every month. Simply divide your vacation’s total cost by 12 to see how much you spend on vacation monthly.
When you’ve seen the alarming rate at which you spend, start creating monthly budgets. It is important to connect yourself to your money, know where every dollar you earn goes to.
Stick to your budget, avoid spending more than you anticipate, and make sure some of your income goes to savings. This will help you live within your means.
Maintain Emergency Savings
You know whether you’re financially healthy if you have enough savings to cover your basic needs when you’re out of job. For this reason, emergency saving is vital to your financial wellness.
After knowing how much you spend monthly, you should make sure you have enough savings to keep your roof over your head, fuel your car, and place food on the table if you’re out of job and have to wait between three to six months to get a new job. This is what emergency savings entail.
It is important to put aside some money as emergency savings, say $1,000 to $2,000. It shouldn’t be an amount that would leave you with nothing for your budgeted expenses. Also, you mustn’t save up all the amount you need in your emergency savings at once. You can start small and then build on it.
Note that your emergency fund shouldn’t be invested in something with fluctuating value or an inaccessible place. It is best to keep it in someplace safe and easily accessible such as a bank account or money market fund.
Ensure You’re Working to Meet Your Future Financial Goals
In all we do in the present, we do it for a better future. Just as you cut down on junks today to stay trim in the future and reduce early health risks, we need to plan our finances towards a better future, especially retirement.
Financial wellness involves you keeping aside enough funds for retirement. To know if you’re hitting your retirement goals, you can run a retirement calculator. When using the calculator, apply conservative assumptions such as an income replacement target of at least 80%, a life expectancy of 90 or above, an inflation rate of 3%, and an average annual investment return of no more than 4-6%.
It is also essential to calculate other goals such as a down payment on a home or education expenses. But be sure to prioritize retirement over education saving because you can’t get financial aid for retirement.
Determining your financial wellness helps you take control of your spending, boost your net worth, and make plans towards a better future. Working in a company with a financial wellness program for its employees is a plus as it saves you from determining your financial wellness yourself.
If you don’t have a financial wellness program in your workplace and you find these steps tasking, you can take advantage of individual financial wellness programs like Limeade and LearnLux. These programs offer you information, training, and support for your day-to-day personal finance concerns.
You can also take a financial wellness test now to know the current state of your financial well-being.
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