Where to Check the Vital Signs of Your Personal Financial Health
There’s an old business saying attributed to more than half a dozen different corporate gurus, and it’s absolutely true:
“What gets measured gets improved.”
There’s something about human nature that turns anything with numbers attached to it into a game. Simply making the numbers better feeds some deep need inside of us. In a sense, that’s probably why there are so many different games out there to teach us how to play with numbers and, ultimately, money management.
You can use that quirk of our species to help improve your personal finances incrementally month after month. But to start, you need to find out what your numbers look like right now. Starting with these key indicators of your personal financial health.
1. Daily Spending
This is one of the simplest to understand, and the one you should interact with most often. Simply a tally of how much money you spent on a given day. Multiply by 31 and compare to your monthly budget, to tell if you can sustain the lifestyle that day suggests.
Why it matters: This is how you keep track of your spending, and begin to discipline yourself. Financial health is about accountability, and this is where you hold yourself accountable.
How to calculate it: Keep notes or receipts for everything you spend that day, excluding bills. Total it up that evening. You can also make use of an app, such as the Spending Tracker. The next step is a little more complicated:
- First, multiply that number by 31. If you spent $50 today, your number would be $1,550.
- Second, subtract your monthly bills from your monthly income. If you made $4,000 per month and your bills added up to $2,500, this number would be $1,500.
Aim for: Compare the first number to the second number. If the first is lower than the second, it was a good day. In this case, you’d be a little bit over. No emergency, just enough to scale back for the next couple of days.
Quick fix: Hold a “spending fast” once a week where you buy nothing. That will help you recover from any days where you got a little out of hand.
2. Subscription Count
Subscriptions are sneaky money eaters. You sign up and forget about them, but the fee keeps coming out of your bank account every month. Keeping an eye on them helps keep costs low.
Why it matters: Forgotten and unnecessary subscriptions can eat up $100 or more out of your personal budget every month. That’s $1,000 a year you could be spending on a great vacation or saving toward retirement.
How to calculate it: Go through your bank and credit card statements each month and tally up how much you spent on subscription services of various kinds. Be sure to include extra charges on your utilities, like unlimited data on your phone and premium cable channels. Take advantage of chatbots such as Charlie or Trim to make the process even easier for you, as they will automatically track your spending and subscriptions and save you oodles of time.
Aim for: There’s no set one-size-fits-all number for this vital sign. Just be sure you’re using and enjoying everything you’re paying for.
Quick fix: If you can’t think of a time that month you used the service, cancel it. You can always resubscribe if you miss it later.
3. Monthly Income
Note how much you make each month from your job, including extra regular income from rent, a second gig or other sources.
Why it matters: It’s your baseline. How much you make each month determines how much you can afford to spend on other things.
How to calculate it: Total all your income from regular and reliable sources. Do not include one-time “bonus” money like selling an old appliance on Craigslist, bonuses or overtime.
Aim for: Well, as much as you can really. This one’s what determines most of your other “aim fors.”
Quick fix: Find a way to earn an extra $100 each month using online work, a part-time job, teaching a class or other source. That extra $1,200 a year won’t hurt anything.
4. Debt to Income Ratio
This measures how much of your money you actually get to spend on yourself, versus how much you’re spending on what you spent on yourself earlier. It’s a huge part of your financial quality of life.
Why it matters: What you spend servicing debt each month is money you can’t spend getting ahead financially. The lower you can get it, the better.
How to calculate it: First, add up all of the minimum payments on every loan, credit card, credit line, and similar credit account on which you owe. Then divide that amount by your monthly income.
If you make $4,000 a month and pay a minimum of $2,200 on your mortgage, car loan, student loan and credit cards, your debt to income ratio is 55%.
Aim for: A 0% debt-to-income ratio is ideal, but if you own a car or home, it may be unrealistic. Mortgage companies look to keep the ratio below 43%. If you can keep it below 30%, you can consider this vital sign to be very healthy.
Quick fix: Pay off your lowest-balance loan or credit card as quickly as possible. Removing that minimum payment alone can make a difference.
5. Debt Emancipation Date
Your debt emancipation date is the day you will be done chipping away at your existing debt (an exciting day indeed!).
Why it matters: This is a powerful psychological illustration of the cost of interest on your loans, and helps to motivate you to kill debt instead of taking more on.
How to calculate it: Do this in December using the following steps.
- For each debt account you have, multiply the current balance by its annual percentage rate (APR).
- Total your results from step one. If you had $6,000 in mortgage interest, $500 interest on your car loan, and $500 interest on three credit cards, your result would be $7,000. (Note: you can tweak this to account for lowered interest as you make payments, but that’s not as motivating. Keep it simple).
- Divide your annual income (your monthly income times 12) by 365. If you made $54,750 a year, your result would be $150.
- Divide the result from step 2 by the result from step 3, rounding up to the nearest whole number. In this example, the result is 47.
- Count the result from step 4 out on your calendar, beginning on January 1. In this example, you would come up with February 16th.
February 16th would be the first day of the year when money you earned actually went toward you, instead of toward the banks and credit card companies.
Aim for: Earlier is obviously better. Most families find their Debt Emancipation Day falls in February or March. If it’s in the spring or the summer, you may be in trouble.
Quick fix: Identify one account you could pay off early to bring your Debt Emancipation Day a week or more earlier in the year. Then pay it off using some of the tactics described in the third step for making more income.
6. Savings Percentage
The savings percentage is what part of your income each month you save toward retirement and other long-term goals.
Why it matters: This measures both how much disposable income you have (you can’t save what’s not left over), and how disciplined you are with your money.
How to calculate it: At the end of the month, divide how much you saved by your monthly income. Be sure to include payroll contributions to 401(k), pension, IRAs and other retirement accounts.
If you made $6,000 last month and put $300 towards savings, your savings percentage would be 5%.
Aim for: 20%. You should save at least 20% of your earnings, split evenly between 10% towards retirement, and 10% into emergency funds and long-term savings.
Quick fix: Get in the habit of dropping all one-dollar bills and change from the day into a jar, then deposit it in savings at the end of the month. See how much that ups your percentage.
7. Emergency Fund Level
Another simple but vital measure of your financial health, this measures your immediately available cash reserves.
Why it matters: An emergency fund means you don’t have to take on extra debt when the little and medium things go wrong. It insulates you from getting your finances sidetracked by the unexpected.
How to calculate it: Set aside a (preferably free) savings account as your emergency fund. What’s its balance?
Aim for: There are three numbers you should aim for here, depending on your current financial situation:
- “Bank account buffer” of $1,000 to help avoid overdraft and late fees. Use this goal if you have no appreciable savings.
- “Simple emergency fund” of three times your monthly take-home salary. If you make $3,500 a month, this should be at $10,500. Use this goal if you have some savings, but aren’t systematic about it.
- “Ready for anything” money of one full year of your monthly take-home salary. Use this if you’re already aggressive about your savings. Honestly, if you’re above this in your emergency fund you should divert some of it to more productive investments.
Quick fix: Add $1,000 this quarter using whatever means you must.
This financial checkup is just like a medical checkup. These vital signs will give you an accurate reading of your health today.
There’s another way it’s like those medical checkups, though. Some people avoid going to the doctor because they’re afraid of getting bad news. That doesn’t actually improve anything. It just lets them dig a deeper hole before something makes it so they can’t ignore the problem anymore.
Don’t fall into that trap. No matter how bad the numbers are today, knowing them is your first step toward making them look better tomorrow.
Paulette Acworth is a financial advisor for start-ups and the occasional private client.