Nowthat you’ve landed on this page, it’s safe to assume that you start to wonder how to assess your financial health.Similar to your body health, it’s also important to evaluate your financial health.It’s because your finance can either make or break you in many cases. So,having an awareness of where you stand financially is crucial.
Assessing Financial Health and Why It IsImportant
Ask yourself:when was the last time you evaluated your financial health? If finance is oneof your concerns, you might have been evaluating your own financial wellnessannually or even monthly. However, if you aren’t aware of its benefit to yourlife, you might never do it even once.
WhatIs Financial Health?
Beforegoing any further, you need to first understand what financial health isactually. In general, financial health is a term utilized to describe the stateof someone’s personal financial situation. There are a number of dimensions tofinancial health, including how much you are putting away for retirement, theamount of savings you have, and others.
Signs of Strong Financial Health
Before learningmore about how to assess your financialhealth, you should know what kind of financial condition that indicatesstrong financial health. There are actually some typical signs of goodfinancial health. They include rare changes in expense, a steady flow ofincome, powerful profitability ratios of investments, and a cash balance whichis growing.
TheBenefit of Assessing Financial Health
Then,what makes it important for you to assess your financial health? One of thebest reasons to evaluate your financial health on a regular basis is tounderstand where you stand financially. As a result, you’ll be able to decidewhat adjustments needed to make the most of your financial health.
How Do You Assess Your Financial Health?
Andnow is the real thing: how can you assess your financial health? There areactually some simple ways that you can do. If you have written down what youwanted to accomplish financially beforehand, you can start from there. But ingeneral, here are some of the best ways on howto assess your financial health.
Step #1: Determine / Calculate Your Net Worth
Thefirst step in evaluating your financial health is discovering what your networth is. This term is a common way to see how you stand financially in amatter of a minute. It’s measured by simply taking your assets value and thensubtracting your liabilities. Luckily, there are some apps that can help youcalculate your net worth nowadays.
How to calculate your net worth
Todetermine your net worth, you should first write down everything you havewhich’s considered an asset. It includes your cash, home, and investment. After that, subtract everything you own as adebt including credit card debt, student loans, and mortgage. In this case,your income doesn’t factor into the equitation at all.
What to do from here
Then,how to assess your financial healththrough your net worth? When it’s actually easy to compare your net worth withothers, it’s not recommended to do so. The point here is to write down whatyour net worth is today and track it regularly. Then, try to focus onincreasing your net worth five to 10 percent each year.
Step #2: Calculate Your Debt-to-Income Ratio
Sinceyou’ve found out your net worth, it’s time to take a look closer at your incomethat isn’t considered in your net worth. Now, let’s calculate yourdebt-to-income ratio. You can calculate it by taking the total amount of yourdebt and dividing it by your gross income in a month.
How to calculate your debt-to-income ratio
Forinstance, let’s say your gross income in a month is $7,000 and you owe thefollowing debt payments: mortgage, car, credit card, and a student loan whichare $2,450 in total per month. Divide this debt payment by your gross incomeand you have the debt-to-income ratio which is 35%.
What to do from here
Nowthat you learn how to assess yourfinancial health through your debt-to-income ratio, what should you do? Foryour information, many recommend someone to have a debt-to-income ratio of 30percent or lower. However, it’s more recommended to go lower than that. So, youshould control this ratio under 20 percent if possible.
Step #3: Discover Where Your Money Is Going
Whenit comes to evaluating your financial health, it’s important to know how youspend your money. You should be aware of where your money is coming and goingto. It might seem time-consuming, but it can help you to become more connectedwith your own money. You can do this by making a budget.
How to figure out where your dollar is going
Creatinga budget is one of the best ways to learn about where your dollar is coming andgoing to. There are many budgeting methods and tools available out there tohelp you make the most of it. You can start with an app that can easily importyour bank transaction and categorize them.
What to do from here
You’veknown how to assess your financialhealth through your budget. Then, what’s next? The main goal of budgetingis to get a handle on where your dollar is going. It isn’t about making itperfect every month because you’ll most likely fail to spend more than youexpected. So, just try to stick to your budget.
A Few Final Words
Nowyou’ve known some of the best ways to evaluate your financial health. There areactually some other things that you can do such as considering your retirementplanning and investment strategy. Having a good retirement plan is important tomake sure that you’re on track to meet your retirement goals.
Finally,you should analyze your investment strategy as well. Make sure your strategy ininvesting your money is aligned with your financial situation. Don’t forget toallocate your money in an emergency fund as well. That’s all what you need toknow about some smart ways on how toassess your financial health.
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