If you want to know how you’re doing financially; it’s a good idea to have some sort of measure in place to work that out. But what should you measure? Well, I’ve got 5 good barometers of financial health lined up for you to use today:
One: Check Your Net Worth
Unless you are retired; your net worth should be increasing throughout your working life. To calculate your net worth: add up the value of everything you own (cash, home, investments) and then subtract the value of all your debts (credit cards, mortgages, loans, etc.).
Do this once a year. And try to ensure that next year you either have 10% more than this year if your net worth is currently positive and if it’s negative, try do bring it to positive as fast as you can.
Two: Check Out How Much You Owe Compared To How Much You Earn
This is easy. Work out how much you pay each month in debt repayments (mortgages, cards, etc.) and divide it by your monthly income (after tax). Multiply by 100 to get a percentage.
Your ideal target is 0. No debt at all. But reasonably speaking if you have a mortgage that’s not going to happen. So, 20% or less is ideal. 20%-40% is cause for a little concern. 40%+ is time to take urgent action to reduce your debts.
Three: How Much Are You Spending On Housing
The average American fritters away nearly 40% of their income on housing! So, for someone earning $50,000 a year, they’re spending $20,000 on their home!
This is too much. It’s this kind of overhead that stops you from being able to save or invest for your future. If you’re spending more than 30% of your income on housing, the best thing you could do for your financial health is downsize a little. Move to a more distant neighborhood or into a smaller place.
Four: Track Where Your Money Is Going
If you don’t have a budget, then you need one. This doesn’t require an accountant or hours of your time – see my very simple budget making tips to get one started fast. If you don’t know where your money comes from or where it’s going… how are you going to get better at managing your money?
When you can see what your biggest or most unnecessary expenses are, you can take steps to reduce them. So, make your budget, right now!
Five: Get A Free Credit Check
You can get a free credit check from the link at the bottom of this page. This isn’t quite the same as your credit report held at the bank but it’s a good place to start to see if you have credit problems and what you can do to fix them.
Bad credit ratings mean more expensive debt which in turn makes it harder to pay off debt and to save money. So, make sure that you do this right away.