24 Jul 2018 | Written by Louis Tully
Why do we go to the doctor? We know checkups are important, but why are they important? To put it plainly, your body’s health is an essential part of your life and it’s a factor none of us should ignore. Going to the doctor once a year is a way to prevent disease, diagnose an existing problem and above all, it’s a way to make sure we’re taking care of ourselves so we can live happily. The same is true of our finances. Like it or not, money is another important life factor that shouldn’t ever be ignored. You need money to pay for your housing, transportation, food and countless other things. So, while we may not like it any more than going to the doctor, it’s critical to checkup with our finances too. Here are 5 ways to check up on your financial health:
The first step to checking up on your finances is to calculate your net worth. This is done simply by taking the value of your assets and stacking it against your liabilities. In other words, add up everything you have and then subtract everything you owe.
What you have
What You Owe
Don’t worry if your net worth is in the negative numbers, you’re not alone. In fact, a 2017 report revealed that well over 16 million American households carried a negative net worth. Check your net worth annually and try to increase it by 5-10 percent each year. Don’t bother comparing your net worth to others’. Remember, you’re merely trying to better yourself, not compete against your neighbor.
Now that you know your net worth, it’s time to look over your debt-to-income ratio. This isn’t the same as calculating your net worth. Simply, add up the total amount of money you make before taxes in one month. This is your gross income. Then, add up your monthly debts. Your monthly debts could look like the following:
Let’s say your total debt payments adds up to $2,450 and your monthly gross income is $5,000. Simply divide your monthly debts by your monthly gross income. Your debt-to-income ratio would be 49 percent (2,450 / 5,000 = 0.49). Most lenders recommend a debt-to-income ratio of 30 percent or lower. The lower your debt-to-income ratio, the better. To lower your debt-to-income ratio, either find ways to increase your monthly income or decrease your monthly debt. Ideally, you should strive for both.
People are too careless with their money these days and very few even bother to stick to a budget. That’s why more than 70 percent of Americans have little to nothing in savings, all the while living from paycheck to paycheck. But it doesn’t have to be this way. A wise man once said, “It’s not about how much you make. It’s about what you do with what you make.” Creating a budget that works for you and sticking to it is essential to financial health. If you ever want to get ahead financially, you need to stay connected to your money. Look over your recent billing statements and carefully examine where your money was spent in the last 30 days. Then, take steps to limit your spending by setting a budget that will give your money room to grow.
Another important aspect of financial health is making sure you have a retirement savings plan set up. Investing in a 401(k), Roth IRA or any other investment account is a good place to start. If you’re looking for an easy way to manage your investments while navigating through the market for the first time, Betterment is a highly recommended online financial advisor that can help.
Overall, if you don’t know what you want, you won’t achieve anything. This is true for all things in life, especially finances. That’s why having a reachable goal is critical to financial health. Take a moment to figure out where you’d like to be with your finances in 5 years, or even just 1 year. Once you have an attainable goal in mind, use the steps mentioned above to reach it. By simply sticking to your budget, you’ll see your finances grow to a level far beyond anything you could have imagined possible before.