When most people consider their finances, they likely only consider the day to day aspects such as their ability to buy the things they want.
However, that’s only a small aspect of your overall financial health. Instead, there are a few different indicators you should turn to when determining how stable and secure your financial situation really is:
The size of your savings/emergency fund
Your ability to cover an unexpected expense without going into debt will play a major role in determining your financial health. Thus, having an emergency fund along with some other savings is crucial.
A “complete” emergency fund typically consists of three to six months’ worth of essential bills – basically, what you need to cover food, housing, utilities, etc — you will help keep you afloat in the event of job loss or another financial catastrophe. On top of that, it’s always a good idea to maintain a “rainy day fund” or other savings that you can tap for smaller but still unexpected costs. The closer you get to reaching these savings goals, the more financially stable you’ll be.
Debt to income ratio
Like its name implies, your debt to income ratio compares the amount of money you bring into how much you spend on recurring debts such as mortgage or loan payments. This figure is typically expressed as a percentage, meaning you spend X% of your monthly income on paying down debts. Maintaining a percentage under 36% is considered acceptable, but obviously, the lower the percentage, the better. Not only does working toward a better debt income ratio help your financial health but also increases the likelihood of your obtaining a loan or mortgage.
Finally, your net worth assesses how much money you have along with the value of any assets you have (houses, cars, etc.) and compares them to the amount of debt you have. In most cases, your net worth should rise with your age as you have more time to save for things like retirement. As a result, some financial commentators have offered age-based net worth goals you should strive to reach.
For example, some suggest your retirement savings should at least equal half of your annual income by the time you reach age 30, with your net worth climbing to double your salary by age 40. While the other indicators above will signal your current financial situation, your net worth will actually point to your long term health.
These are just three of many different financial indicators you should be aware of. Of course, just knowing where you stand isn’t enough — you should also take action to grow your emergency fund and savings, lower your debt to income ratio, raise your net worth, and improve your financial health overall.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.