When you went, you were probably getting some type of check-up—whether it was preventative or to diagnose an issue.
We take care of our bodies, as we should, by going to the doctor. Through this process, we’re assessing our health.
Since this all sounds pretty obvious, let’s follow up with a similar question: When was the last time you assessed your financial health?
Our finances can make or break us in many cases, so having an awareness of where we stand financially is critical.
By doing a financial wellness check, we’ll be able to determine what adjustments we need to make in our lives—from saving to spending to earning.
In this article, I’ll share the five most important steps to assessing your financial health. Let’s first begin with your net worth.
Determine your net worth, and see which way it’s trending
The first step in assessing your financial health is finding out what your net worth is. Net worth is a common way to see how you stand financially quickly. It’s calculated by simply taking the value of your assets and subtracting your liabilities.
Some apps, like our free spreadsheet), do this for you, but the math is quite simple. Write down everything that you own that’s considered an asset (i.e., cash, investments, your home) and subtract everything you have as a debt (i.e., student loans, credit card debt, mortgage). Your income doesn’t factor into this equation at all—it’s merely a gauge on what you currently have versus what you owe.
The reason I love net worth is that it’s easy to compare apples to apples. I don’t recommend comparing yourself to other people (that’s a whole new topic) but rather compare to yourself. This way you can see how your net worth is trending.
For example, let’s assume you have no other assets or debts besides your home. If you own a home that’s worth $200,000 and you owe $160,000, your net worth, in this case, would be $40,000 ($200,000 – $160,000). As you pay down your mortgage, your net worth grows (assuming your home value stays the same or increases).
It’s okay if you have a negative net worth now. The point here is to write down where your net worth stands today, and track it on a regular basis. Tools like Personal Capital and Mint do a great job at this.
Your net worth is nothing more than a personal measuring stick on how well you’re doing with your money. Yes, higher net worth is better (or even a positive net worth, for some) but you really shouldn’t measure yourself against anyone else. Everyone’s circumstances are different, and by comparing you’ll drive yourself nuts.
Focus on increasing your net worth 5-10 percent each year as a baseline through debt pay down and asset accumulation.
Calculate your debt-to-income ratio (and try not to scream)
After you’ve figured out your net worth, it’s time to take a closer look at your income (which isn’t considered in net worth, remember). Your debt-to-income ratio is calculated by taking the total amount you pay in debt payments and dividing it by your monthly gross income.
So for example, let’s say your monthly gross income (before taxes and other deductions) is $7,000, and you have the following debt payments:
- Mortgage – $1,800
- Car – $300
- Student Loan – $200
- Credit Card – $150
So your total debt payments are $2,450 per month. Divide that by your gross income of $7,000 and you have a debt-to-income ratio of 35 percent ($2,450 / $7,000 = 0.35). Most people (and most lenders) recommend a debt-to-income ratio of 30 percent or lower. I would recommend going even lower than that and trying to keep it no more than 20 percent.
Your debt-to-income ratio is important for a couple of reasons. First, it’ll give you a good sense of whether or not your debt is under control. If you’re approaching a debt-to-income ratio of 40-50 percent, it’s time to start worrying.
Second, your debt-to-income ratio is a primary factor in your credit score and in getting new credit. If you have a high ratio, many mortgage lenders will refuse to work with you until you pay your debt down (depending on other factors, of course).
Get your debt-to-income ratio under control. I would shoot for well under 20 percent.
Also, a quick fix for this ratio might seem to increase your income by picking up a side hustle or a second job. While that’s true, it’s not addressing the cause of the issue: The fact that your debt is too high. My advice would be to work on paying down your debt as aggressively as you can to get below that 20 percent number. This is an important metric to measure your financial wellness and should be a top priority.
Evaluate your housing situation
Data from 2017 shows that Americans spent almost 40 percent of their budget on housing. That’s $24,000 per year on a $60,000 annual salary, for example. If that doesn’t strike a chord with you—think again.
As we try to keep up with the Joneses, we’re getting into more and more expensive homes that we can’t afford. Remember what happened in 2008? To avoid another housing crisis, we need to find a way to get ourselves into housing that we can afford. This is another key step in evaluating your financial health.
I’m not a fan of pegging a percentage of your budget that should go toward housing. For example, many “experts” say you should spend no more than 30-40 percent of your budget on your housing payment (rent or mortgage). There are too many variables to consider to be able to use a blanket number, though.
For instance, if you live downtown, more than likely you’ll pay a premium. But you may not need a car because you can walk to work. Living an hour outside of the city, on the other hand, might get you cheaper rent, but you’ll need to worry about commuting costs such as gas and parking. These expenses might offset the savings you’re getting by living far outside the city. So to me, giving you a blanket percentage of how much to spend on housing doesn’t make sense.
Instead, I’d encourage you to find a cheaper option than what you have—regardless of what you’re paying for rent or a mortgage. If you love where you live and aren’t willing to relocate, consider getting a roommate. If you’re willing to move, find a way to get something comparable for less money.
Also, consider how much space you need. If you’re just starting out, do you need to buy a four-bedroom home in a new development? I lived in a two-bedroom starter home for six years, including when we had our first child. It’s possible, and we tend to need much less space than we think.
If possible, find a cheaper place to live.
Use a site like Niche.com to check out new areas that are more affordable. If you’re stuck in your home, find a way to reduce your mortgage payment—like through refinancing or renting out a room in your home.
Find out where your money is going (and if you’re spending more than you should)
For a long time, I didn’t budget my money. I just made sure that my checking account didn’t overdraw and I threw as much as I could into savings every month—which sometimes wasn’t much. Bad financial move on my part.
You should be intimately aware of where every dollar is coming from and going to. This might sound crazy and time-intensive. Trust me, it is. But if you ever want to get ahead financially, you need to become very connected with your money.
You can do this by creating a budget and doing your best to stick to it. Personally, I use YNAB, and I love it. I don’t worry as much about which categories my spending is going to, because I can “move” money from one category to another. The goal is not to spend more than I’ve allocated for the month.
You don’t have to use YNAB, though. There are plenty of budgeting methods and tools you can check out. The goal for you here is to get a handle on where your money is going.
Start with a tool like Mint. Here you can import your bank transactions and categorize them, so you can begin to see spending patterns and trends. I would recommend importing the past six months of spending so you can have some idea of where you’re spending too much.
Once you have a good understanding of where your money is going, you can create a budget. Again, the goal isn’t to make it perfect every month. In fact, if you try to be perfect and never spend more than you anticipate, you’ll most likely fail. Instead, budget the money you already have and don’t spend any more than that. Make sure part of that money goes toward savings.
Create a budget—now. I’m oversimplifying the budgeting process intentionally. There are plenty of ways you can budget your money (50-20-30 and Envelope to name a couple), but my strongest recommendation is to use YNAB.
If you’ve read my articles before, you’ll know I’m a huge advocate because it completely changed my financial life. I used to be terrible at budgeting, but YNAB has a system that works for me. It makes it okay to fail one month, but still stay on track with your financial goals.
Yes. You should be investing if you aren’t already.
Whether in a 401(k), Roth IRA, or another type of investment account, you need to ensure your money is in stocks. If you’re looking for a worry-free way of breaking into the markets, we recommend robo advisor like Betterment, which will manage your money for you and create a low-fee portfolio of investments based around your own individual needs.
Don’t get me wrong; you should have money stashed in an emergency fund first. If you don’t, focus on building up at least six months’ worth of expenses in an emergency fund and stick that in a savings account.
After that, though, focus on investing. And make sure your strategy is aligned with your situation.
What do I mean by that?
Before you invest a single dollar, you need to consider a few factors, including:
- Your risk tolerance. If you’re young and have a long time before you expect to retire, I’d recommend going as high as 100 percent in stocks. If you’re more risk-adverse, however, you may want to adjust this percentage.
- Funds that align with your values and goals. Do you want to invest in companies that are riskier but offer a higher potential reward, or would you prefer to stick with the established, tried-and-true companies that may not explode your portfolio’s growth? Also, consider the type of business the companies you invest in do. If you want to be supportive of the environment, for instance, you should look at green companies that use recycling and renewable energy as part of their strategy.
The goal here is first to ensure you’re investing, but then evaluate your strategy. I can’t tell you everything you need to know about investing in this article, so I’ll instead urge you to read a few of our more in-depth pieces on the subject:
- How To Invest: The Smart Way To Make Your Money Grow
- 5 Easy Ways To Start Investing With Little Money
- Should You Delay Retirement Contributions To Pay Off Debt?
Finally, create crystal-clear financial goals for yourself and your family
Here is an incredibly powerful quote from—wait for it—Alice’s Adventures in Wonderland by Lewis Carroll:
One day Alice came to a fork in the road and saw a Cheshire cat in a tree.
“Which road do I take?” she asked.
His response was a question:
“Where do you want to go?”
“I don’t know,” Alice answered.
“Then,” said the cat, “it doesn’t matter.”
Think about that passage for a moment. How does it relate to money?
The answer is simple:
If you don’t know where you want to go or what you want to achieve, then it doesn’t matter which path you take. You won’t get to where you want, because you don’t know what you want. Thus, you’ll never reach any financial goal.
Establishing clear financial goals is the first and most important thing you should do when you’re doing a financial checkup. These goals will help you decide which “path” to take in your financial future.
A real-life example
Almost three years ago, we found out my wife was pregnant with our first child. Up to that point, we’d lived like many other married couples without kids. We had plenty of disposable income, we had paid off all of our debt, and we were working on maxing out our retirement accounts.
But we knew we wanted to have a child, and we knew that having a child was absurdly expensive.
So the moment we found out she was pregnant, we hit the pause button on all of our other financial goals and began putting every dollar we could into a cash savings account.
Because of this, we were able to sock away a significant amount of money during her pregnancy, and we had a nice chunk of money to pay for all the expenses that come with having a baby.
Had we not known where we wanted to go, we wouldn’t have been able to plan appropriately. In fact, we probably would have kept living as if we weren’t about to have a baby—going out all the time, buying things we wanted, and stashing money in long-term investments.
It may sound simple in hindsight, but at the moment, setting clear financial goals can be pretty challenging.
My advice is to identify what you want to achieve in the short term and long term, and write those goals down. Studies show that those who write their goals down have a much higher success in achieving them.
These are just some of the quick steps you can take to get a pulse-check on your financial health. It’ll give you the baseline of where you’re at. To go even further, explore our archives to read as much as you can about different areas of your financial life—such as getting the right insurance, buying a car, and building up your credit.
- Depression And Finances: Steps To A Healthy Financial Mindset
- 8 Apps That Help You Build Your Net Worth