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4 Easy Ways to Measure Your Personal Financial Health

6 min read
Have you measured your financial health? At first glance, it may seem easy to guess what your financial health is up to, but have you looked closely at your

Have you measured your financial health? At first glance, it may seem easy to guess what your financial health is up to, but have you looked closely at your overall situation? This detailed view will lead to the collection of information from all your accounts, investments, bank accounts, insurance, retirement accounts, and more. If you never take the time to make this assessment, you may find that there is a bigger difference between your financial situation and your actual situation; however, it is never too late to determine and control your overall economic situation.

As for your financial life, do your best every month. You save money wherever you can. Don’t buy too much. And you pay the debt. But how do you know if you are really on the right track and making the right financial decisions? Is there a way to list your financial goals without opening a huge spreadsheet or getting lost in endless financial jargon?

Of course, there is and we are ready to help you. Here are four easy ways to measure and potentially improve your financial health:

Understand Your Credit Score

One of the easiest things to check to see how your finances are being managed with others is a free credit report from one of the major credit reporting agencies (TransUnion, Equifax, and Experian). You can request a free report for each year.

Your creditworthiness is what lenders use to assess your financial situation, possible repayments, and the interest rate they can pay on the loan.

Here’s a quick key to reading your credit score:

  • 850 to 720 means you have excellent credit
  • 719 to 690 means you have good credit
  • 689 to 630 means you have fair credit
  • 629-300 means you have bad credit

Improving your credit score

If you are under excellent, there are ways to increase your score. One of the most important steps that financial experts recommend is to pay your bills on time and in full each month. Maintain your living expenses when you have to pay the amount that is due and focus on having enough money each month to cover your expenses.

If your report doesn’t have much credit history or type of credit, you can also apply for a loan to build a secured loan or card. With this service, you deposit funds into your account and this is your credit or card limit. The service then reports your card or credit usage to the major credit bureaus for a fee. Be careful if you mishandle a card or loan or fail to make a payment, this will also count and will not help your results.

Know Your Net Worth

When evaluating your financial health, calculating your net worth is a good place to start. Why? It gives you an easy way to get a complete financial picture.

Your net worth is the difference between your assets and liabilities. After all, that’s what you have, minus your debt.

Calculating your net worth shouldn’t be complicated. First, make a list of everything you have (bank accounts, emergency savings, your home, retirement accounts, etc.) and add them up to get the total. Then make a list of all debts (credit card debt, student loans, mortgages, etc.) and add them up to get the total. Take what you owe from what you have. That number is your net worth.

For all the homeowners out there, this calculation can get a little tricky. We are constantly told that our house is an asset. But when you have a mortgage, it is also an obligation. Let’s say you own a house worth $500,000 and your mortgage is $400,000. You would put your $500,000 home on your asset list (what you own) and your $400,000 mortgage on your to-do list (what you owe).

Your monthly income and budget don’t take into account your net worth. This is just one way to find out if you currently have more or owe more.

Improving your net worth

Ideally, you want to have a positive net worth. The higher the value the better.

Don’t be discouraged to look at your financial profile if your net worth is negative. When I left school with six-figure loan debt, my net worth was negative. It may be frustrating, but it’s just a measure of where you are and you can always make changes to improve your situation.

One way to point your net worth in the right direction is to increase your monthly cash flow. Adding additional income directly to your savings account or emergency fund can increase your financial security.

Measure Your Cash Flow

Money in and out every month; This is known as your cash flow. Your cash flow tells you whether you are living within your means or a little too much. This is important because your net worth is based on your monthly cash flow. If your monthly cash flow is positive, you will increase your net worth. If it’s negative, you’ll see your net worth go down.

A good goal for your financial well-being is to have more money coming in than going out. It’s a simple concept, but not always easy.

To measure your monthly cash flow:

What you earn minus expenses = net cash flow

Experts usually recommend that your net cash flow be at least 20% of your monthly income. For example, if you make $5,000, you want at least $1,000 of net cash flow at the end of the month.

Improving your cash flow

Still not at that 20%? Many uses can help you identify your expenses and make budgeting and building a financial plan easier. Two popular options are Mint and YNAB.

Or you can take the low-tech route and just sit back and write down how much you want to spend and where you can save. Print out your credit card statement and mark areas where you can reduce your costs. The specific technique doesn’t matter; you must know where your money is going in the short term.

Calculate Your Debt-To-Income Ratio

Your debt-to-income ratio (DTI) is important because it gives you an idea of ​​whether you’ve been in too much debt. This is also the number that lenders often use to decide if they can give you more credit. When you are trying to buy a house, this number is very important.

You can calculate your DTI ratio by dividing your total monthly debt payments by your gross monthly income (your income before taxes).

For example, let’s say you have a gross monthly income of $6,000, you have a monthly debt payment of $950, including student loan payments of $550, a car payment of $250, and a credit card payment of $150 to your monthly DTI is 16%.

Lenders want to look at lower DTI rates because they can be sure that you can handle the monthly debt payments. Most lenders will not give you a mortgage if your DTI is more than 43%.

When you apply for a mortgage, the lender may include your estimated monthly mortgage payment in the DTI calculation. If you want to buy a home that has a monthly mortgage payment of $1,700, your new DTI is 44%. This is higher than most lenders will agree to and it can be difficult to find a loan.

Developing your debt-income ratio

Knowing your DTI before applying for a mortgage or other loan can help you understand how to make your application as robust as possible. Some options that can improve your application include paying off some long-term credit card debt or asking for a smaller amount of money.

Regardless of whether you want to apply for another loan, having the lowest possible DTI means creating a solid financial future without burdening yourself with debt.

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