Nowadays, it is easy
to get sucked into the misconception that some liabilities are an investment.
Thus, some people may think that they have their personal finances in order but
instead end up getting into debt. Many may wonder, what are some indicators of
good personal financial health?
According to Truman Advisors, there are several ways to judge the health of your personal finances. Here are some of the questions you want to
ask yourself as you think about your savings, investments, and other personal
assets.
How to Judge the Health of Your Personal Finances
Do you have zero debt? If not, is your debt in control?
The first sign of having a healthy personal finance status is having zero debt
or having your debt in control. According to Truman Advisors, having your debt
in control means that you have enough ongoing income in order to pay your debt
and your daily needs, plus have enough to keep in your savings. Some of the
most common debts include:
Mortgage: Housing, rent or utilities often comprise up to 40% of the budget of
the typical American household.
Student Loans: If you’re a recent graduate, be sure to allocate enough funds on
an ongoing basis to begin paying back any student loans.
Other Loans: Did you take out a business loan or some other form of short-term
loan? If so, make sure these debts are paid off as soon as possible to free up
income for other big-ticket budget items.
Are your recurring payments under control?
Although mortgage and loans are technically recurring payments, they eventually
have an end goal in mind. Traditionally a recurring payment includes indefinite
expense like utilities, cable, phone bills, and other expenses that are
service-based and ongoing. If your finances are in order, your existing
recurring payments should leave plenty of money left over at the end of the
month for other purposes.
A good way to evaluate what you’re spending each month on recurring payments is
to make a list of all the services for which you’ve subscribed. Take special
note of any services you no longer use or which have a downgrade available that
can save you some money.
Do you have a good credit score?
Having a good credit score is an indicator that you are responsible with your
finances and can pay off loans or debt successfully. Although it is good advice
to pay in cash or debit when you can, actively using credit cards from time to
time can help establish a healthy credit score for the times when one is needed.
There are free ways to check your credit score, such Credit
Karma. Additionally, there
are several ways to keep your credit score in check like paying your mortgage,
loans, and other recurring payments on time. Having a good credit score has
many benefits, such as being able to apply for credit cards with higher
spending limits or better rates. In essence, this means you are financially
healthy.
Do you have savings?
This may seem like common sense but having a healthy amount of funds in reserve speaks volumes about your overall financial wellbeing. Having an active savings account is a good sign that your income flow is much more than your expenses. Truman Advisors suggest that you save at least 20% of your income, or at least six to eight months’ worth of your regular income as a way to save for emergency situations. You can opt to save more or place the extra in investments to help grow your passive income sources.
Do you have long-term investments?
Another sign of personal financial health is access to long-term investments.
Yes, you do have recurring income, but you need to think about saving for the
future. As long as you trade time for money, you will keep on working and money
will run out once you do not have the physical capability to perform. Thus, it
is wise to have long-term investments in many areas of interest.
This may be in different forms such as stocks, bonds, mutual funds,
ETFs, or high-yield savings account. However, keep in mind that these
investments may be ideally thought about only when debt is paid or controlled,
and income is larger than your expenses. You may do your own research about
what types of investments are ideal for your lifestyle.
Although some aspect of personal finance comes from a personal perspective, it
is good to know these basic indicators of having stable financial health. As
the rule goes, income should always exceed expenses in order to keep finances
in a healthy and fruitful balance.