Financial health is an individual's or household's overall economic well-being. It is determined by evaluating income, expenses, debt, savings, and investments. It also includes assessing your ability to manage finances, plan for the future, cope with unexpected expenses, and achieve financial goals.
Here are some steps to help you assess your financial health:
Determine your net worth.
Your net worth is the difference between your total assets and liabilities. To calculate your net worth, list your assets (savings, investments, property, and possessions) and subtract your liabilities (debts, loans, and mortgages). If your net worth is positive, you have more assets than liabilities, an indicator of good financial health.
Evaluate your debt-to-income ratio.
Your debt-to-income ratio is the amount of debt you have compared to your income. Calculate this by adding up all your monthly debt payments and dividing them by your gross monthly income. A healthy debt-to-income ratio is less than 36%.
Check your credit score.
Your credit score measures your creditworthiness, which lenders use to determine whether to approve you for loans or credit cards. A good credit score is usually above 700, while anything below 600 is considered poor.
Evaluate your emergency fund.
An emergency fund is a savings account that covers unexpected expenses, such as car repairs or medical bills. To determine if your emergency fund is healthy, calculate how many months of living expenses it would cover. Financial experts generally recommend having at least three to six months' worth of expenses saved up.
Evaluate your retirement savings.
Retirement savings are crucial for long-term financial health. If you're employed, check if your employer offers a retirement plan, such as a 401(k) or a pension. If not, consider opening an individual retirement account (IRA). Financial experts recommend saving at least 10% to 15% of your income for retirement.
Assess your spending habits.
Look at your monthly expenses and determine if you spend more than you earn. If so, identify areas where you can cut back, such as eating out less or canceling subscriptions you don't use. Creating and sticking to a budget can help you reign in your spending.
Review your housing situation.
Housing is often one of the most significant expenses, so ensuring you can comfortably afford your current housing situation without compromising other financial goals is essential. Calculate your monthly housing costs, including rent or mortgage payments, property taxes, and utilities, to check that your housing costs are within your budget and leave you enough room for other expenses and savings.