You need a starting point when you want to assess your financial success and goals—a benchmark to evaluate your progress. You cannot ignore quantifying and calculating when it comes to personal financial planning. After all the time you’ve spent working out financially and developing healthy money habits, it’s natural to want to know how well you’re doing.
However, it’s important to know which methods measure your financial health accurately. And, if you know which metrics to check and how to use them, you’ll get a clear picture of your financial situation.
Personal Finance 101:
Ways To Measure Your Financial Success
Everyone should have an idea of their financial standing. By doing a personal financial check, we’ll be able to figure out whether or not we need to make changes in our lives.
Here are a few metrics to assess your financial health.
- Net Worth
Finding your net worth is the first thing to do to begin your financial wellness check. Net worth is a way of assessing where you stand financially. It’s calculated by calculating the value of your assets and subtracting your liabilities or debts.
Computing your net worth is quite simple. Start by summing up all your assets (investments, cash, your house) and subtracting your debts (mortgage, credit card debt, auto loans). Remember, your net worth is merely a gauge of what you currently have versus what you owe.
- Debt-To-Income Ratio
After figuring out your net worth, calculate your debt-to-income ratio. To calculate your debt-to-income (DTI) ratio, add your monthly loan payments and divide them by your gross income.
Calculating your DTI will give a good sense of whether or not your debt is under control. Secondly, your debt-to-income ratio is a primary factor in your credit score. Mortgage lenders will refuse to cooperate if you have a high DTI ratio, as you’ll not be a good fit to lend money to, considering your credit score.
Income has a major impact on your overall quality of life. If you wish to be financially independent and have a strong financial standing, your income should be increasing by 3-5% each year, or you should be making more money from additional income streams.
- Retirement Fund Or Nest Egg
Your retirement fund indicates how prepared you are for the future. The amount of your retirement fund might be a good measure of where you stand financially.
As you set more money aside, in terms of emergencies or savings, you can track your financial progress and see how close you are to reaching your goals.
The portion of your income you save every month is your savings rate. Your Savings Rate equals (Income – Expenses) / income. For instance, if you earn $4000 and save $1000, your savings rate is 25%. A general rule is to hold a minimum of 20% or more of your income.
However, when saving every month, remember that you don’t want to ruin your quality of life to achieve the highest-possible savings rate. Instead, establish a reasonable savings rate that allows you to enjoy yourself presently while saving enough for the future.
The Bottom Line
Being conscious of our finances is important for all of us. And the best way is to keep tracking our financial progress. To get a clear picture of your financial health, start by combining these above-given metrics or using financial planning tools to get actionable results. This way, you’ll know where you’re doing well on your finical status and where you can improve.
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