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When you go to the doctor, they check your vital signs like blood pressure and temperature to make sure you’re healthy. But what about the vital signs for your financial health? These numbers tell you if you’re financially healthy (or not!) and can give you goals to shoot for.
Over time I’ve learned the hard way that I have to go to the doctor and get checked out or else my health suffers. It’s the same with your money. If you don’t pay attention to your financial vital signs, you’ll be headed for disaster.
Here are the financial vital signs I recommend you track:
6 Financial Vital Signs
1. Net Worth
Your net worth is the sum of your assets minus the sum of your debts. It’s a way of telling the true value of the wealth you’re building, not just your income. Your number may be negative, a flat zero, or a positive value. A lot will depend on your age, as younger adults typically have student debts and haven't had time to build as much wealth. In any case, as time goes on your number should be rising. Track your net worth monthly to get a handle on whether you’re rising, falling, or you’ve hit a plateau. If you need help pinpointing your net worth, try this calculator.
2. Credit Score
Along with a good credit report, a high credit score insures you will be able to take advantage of financing (home mortgage for example), get the best insurance rates, and even get the best jobs or apartments. You can find your credit score and full credit report for free at WalletHub (updated daily). Depending on the credit score (there are several types), the numbers range from a low of 280 to a high of 900. Over 700 is considered a good score, but if you’re under that point, you’ll need to work on building it up. This can mean simply paying your bills on time and reducing your debt, or more advanced moves like increasing your credit lines to lower your utilization. Check your credit score at least once a month, and before you apply for anything major.
3. Emergency Fund Size
You may see varying guidelines for how large your emergency fund should be. Some start with a basic $1,000 e-fund while others go for 6, 8, or even 12 months worth of bare bones expenses. What’s important is to stash away an amount that’s appropriate to your circumstances, and to refill it when emergencies crop up. Statistics show that most Americans couldn’t handle a $400 emergency, so it’s important to have an emergency fund of the right size. It's also important to only use your emergency fund for true emergencies. Set your ground rules ahead of time so when a situation comes up, you'll know whether it qualifies.
4. Savings Rate
Your savings rate is the percentage of your monthly after-tax income that goes into savings such as retirement, emergency fund, or long term needs. The average personal savings rate in the U.S. is currently under 6%, but you should aim higher. The standard rule of thumb is to save 10%, but every percent matters and depending on your circumstances, you may need to save more. Now your savings rate probably won't change dramatically month to month, but if you calculate it (and try to increase it) at least once a year, you should be in good shape.
5. Budget
It’s important to track your spending against your budget and make sure you’re staying within your plan. I check my budget monthly, but many people find it helpful to check weekly. However frequently you track it, make a note of your percentage of over or underspending. If you overspend here, you’re going to get into trouble with the next vital sign.
6. Debt Total
Your debt total is a number you want to be as small as possible, preferably zero. Some people only count consumer debt, while others include low-interest debt or debt used for “beneficial” things like a home or an education. How you count it is up to you, but you should know what your number is and be actively working toward reducing it.
So how do you track all of this information? To track your income and spending as well as your net worth, there are tools like Personal Capital and YNAB. Personally I still use good old-fashioned Quicken. Spreadsheets are another good option, and even handwritten will do. To keep an eye on your various vital signs, you may want to create a spreadsheet just for those numbers and track them monthly.
Once you've started tracking, now you can set financial goals based on this information. Depending on where you are in your financial health, you can take it one step at a time. If your debt total is high, start with reducing that (which will naturally lead you to the next step of tracking your budget). Assuming your budget is on course, then maybe it’s time to improve your savings rate. In case you’re savings are high, make sure you are putting enough of that savings into your emergency fund. If all those vital signs are good, then make sure your credit score is where it belongs, and finally, build up your net worth.
Are you financially healthy? What vital signs are you working to improve?
