What is your financial score?
- Poor financial health is directly linked to high levels of stress and anxiety.
- Answering these four money signs can help you determine if your finances are in good shape.
- Your emergency and retirement savings, debt ratio and credit score are key elements in determining your financial health.
Tracking our health is much easier with today’s technology. There are apps and devices that can measure your fitness level and track the number of calories you’ve consumed and burned. But what about tracking your finances?
Unfortunately, 73% of Americans say their finances are the biggest stressor in their lives and 65% say they don’t know how much they spent in the last month. Lack of financial literacy is linked to high levels of stress and anxiety. Here are four money signs that make up your financial health. Evaluate yourself and follow your financial situation!
1. Emergency savings
Nearly 6 in 10 Americans can’t afford an unexpected $1,000 bill. This means that if an unexpected expense arises, many of us have to borrow to cover it. Are you well prepared?
- 10 points: six months or more of your household expenses saved
- 9 points: three to five months saved
- 8 points: one to three months saved
- 7 points: less than a month
Goal: Having an adequate emergency fund is an important part of your financial health. The amount you should have in your emergency fund depends on factors such as your current income and recurring expenses. Most experts recommend setting aside three to six months of expenses. If you’re a freelancer or gig worker, you might want to set aside even more.
2. Retirement savings
About half of Americans (49%) are not financially ready to retire and have no retirement savings. You want to save and invest enough to provide yourself with sufficient income without having to work. Are you saving enough? First, determine how much money you will need in retirement. You can then use a retirement calculator to help you figure out how much you need to save to meet your retirement goals. How does the number compare to what you are currently contributing to savings?
- 10 points: Save 100% of your annual contribution goal
- 9 points: save at least 90%
- 8 points: save at least 80%
- 7 points: save less than 70%
Goal: Compound interest will help you grow your savings. The best time to invest may have been in the past, but the second best time to invest is now. Even if it’s a small amount, take advantage of an IRA, 401(k), etc. A small amount can go a long way. If you are in your 30s try to save 10% of your income and if you are in your 40s or 50s try to save 15%.
3. Debt to income ratio
This number shows how well you manage your debt. A whopping 60% of risk managers cited high debt-to-income (DTI) ratios as their top concern when approving a loan. You can calculate your ratio by adding your minimum monthly debt payments and dividing them by your gross monthly income. For example, if the sum of your loans (mortgage, car, etc.) and your minimum monthly credit card payments is $2,000, and your monthly salary is $4,000, then your DTI ratio is 50%. This means that half of your income will be used to pay off your debts, while making only minimal payments on your credit card! What is your DTI ratio?
- 10 points: DTI of 25% or less
- 9 points: DTI from 26% to 36%
- 8 points: DTI from 37% to 43%
- 7 points: More than 43% (in most cases, this is the highest rate to qualify for a mortgage on favorable terms)
Purpose: Your DTI also plays an important role in your credit score. Pay off your debt and increase your income. Both will decrease your DTI. There are several debt repayment strategies you can use, such as debt snowballing or debt avalanche. Avoid taking on more debt and look for a side gig to boost your income if possible.
4. Credit score
Your credit score is one of the most important financial numbers. Your score determines the interest rate on your loans and credit cards. The difference between a low score and a high score can be hundreds of thousands of dollars in interest paid on your loans over your lifetime! Your credit score ranges from 300 to 850. What is your score?
- 10 points: score of 750 or more
- 9 points: Score between 720 and 749
- 8 points: Score between 620 and 719
- 7 points: score below 620
Goal: Your payment history represents 35% of your score, your debt ratio 30%, your credit history 15%, your credit composition 10% and new credit applications 10%. To increase your score, be sure to pay all your bills on time, catch up on overdue accounts, request a credit limit increase, and check your credit report regularly for any errors. Experian offers a new service where you can get credit to pay for your phone, utilities, and bills like Netflix.
Your end result
Add your total score and divide it by 4. If your score is 9 or more, congratulations, you are in excellent financial health! Make sure you keep working to stay there!
If your score is between 8 and 9, there is room for improvement, but you have made good progress, so keep going. If your score is below 8, it’s important to prioritize improving your financial health. The above steps may help you. Keep improving your finances until you can roll a 10.
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