Did you know that 17% of Americans struggle with some or all aspects of their financial lives?
Working hard to make ends meet only for you to wonder where the money is going is a common problem. In many situations, the income level isn’t the issue. Rather, it’s a lack of financial prudence that leads to feeling like your pockets have holes in them.
To avoid running on empty financially, here’s a six-point financial health check to help you look after your money better.
Table of Contents
1. Get a Grip on Your Accounts
Any kind of financial assessment would be remiss if it didn’t start with getting your personal accounts in order. It’s when you have a clear view of where you’re at that you can chart an effective way to financial health.
Start by adding up all your income to know what you earn in total. That includes any bonuses, interest income, and other cash-generating activities on top of your salary. Once you have this figure, do the same thing for all your expenses. You can then deduct the total expenses from your total income to get how much money you retain.
A common challenge at this point isn’t tracking down total income but rather, the total expenses. There are several expense tracking apps you can use to input every outflow of money.
Whenever you spend, ensure you register it on the app instead of postponing it to avoid forgetting. That helps you capture as accurate an expense log as possible, for a better financial view.
2. Know Your Debt Level
Having debt isn’t necessarily as bad as long as you know how to use it wisely. However, you do need to be aware of all you owe as it factors into your financial assessment.
The debt-to-income ratio is a great way to gain a more in-depth look at how debt affects your financial position. To get this ratio, you divide your total monthly debt expense by your monthly income.
Knowing your debt-to-income ratio’s critical because it’s an accurate measure of how you’re able to meet your obligations. A low debt-to-income ratio is positive, and the recommended level is between 30% to 50%, with anything past 43% pointing to distress.
A high debt ratio is an indicator that you need to gain more control over your debt. Many lenders are wary of borrowers with a high debt ratio, and it can impact your future access to credit.
Another issue to look out for is the type of debt you hold. Having ‘bad’ debt like payday loans and credit card debt is not advisable. You should also ensure your total debt per annum doesn’t exceed 36% of your annual income. If you can hit a lower number here, then the better.
3. Make and Stick to a Budget
For many people, making a monthly budget isn’t that difficult. It’s sticking to it that is near impossible. Yet, overshooting your budget guarantees your financial ship will struggle to stay afloat.
If you do have a budget and repeatedly fail to stick to it, you need to review its feasibility. As long as your budget is realistic, you need to exercise more restraint in not flouting it.
You can adopt a budget tracking app to help you stay the course and learn when you’re dangerously close to overshooting your budget. Additionally, personal finance based blogs such as BudgetxBabe offer valuable tips to help you develop and stick to a budget for the long term. Signing up is a great way to fan the budget flame sustainably.
4. Create an Emergency Fund
When things are going well, it’s easy to assume you’d take care of emergencies. But when push comes to shove, some emergencies can wipe you out financially if you don’t plan.
A rule of thumb is to collect at least three to six months’ worth of living expenses in a separate account specifically created for an emergency fund. If your income source isn’t steady, you should stretch your emergency fund to cover nine months’ worth of living expenses.
You can even go a step further and put that money in an easily accessible near liquid asset that bears interest. That way, inflation doesn’t eat into your emergency fund, and you can quickly liquidate it whenever the need arises.
5. Get Adequate Insurance
On top of an emergency fund, you need to set up adequate insurance coverage to take care of other significant expenses.
Auto, health, and home insurance may be standard, but you need to go beyond that to other policies that aren’t legally mandated but still critical. For example, disability and life insurance are vital in protecting you and your dependents when needed.
If you’re approaching or above 50, you also need to factor in long term care insurance. Such a policy will cover in-home or nursing home-related expenses that can significantly impact your finances at an age where you may not have the stamina to work harder and generate active income.
6. Seek Passive Income
Would your income fall off if you woke up tomorrow and could no longer actively work? Many Americans find themselves in such a situation. You need to create and enhance passive income sources to balance out your personal financial health.
Create a target allocation for investment into passive income, no matter how little the amount. If you’re young, you have time to check out investments with slightly more risk. The older you grow, the more your passive income stream ought to move to lower-risk investments.
Make it a habit to check your portfolio once or twice per year and rebalance your allocation. On top of that, your budget needs to factor in regular contributions to your allocation as you work towards the ideal active-passive income distribution.
A Regular Financial Health Check Will Keep You on Track
You work hard for your income, and as such, your money should work hard for you. However, if your finances are in disarray, you’ll feel like a hamster in a financial wheel. Develop the habit of regularly running a financial health check to ensure you’re on track in controlling your money.
Good financial health is the first step to shaping your financial future. Investing is another critical area that contributes to your financial well-being, and our website’s dedicated to teaching you how to make, save and invest your money wisely. Check out more of our content to learn how to best steer the ship that’s your financial future.