It’s important to give your financial health the same attention you give to your physical health. While there are experts who can help you analyze your finances, you can measure your own financial health by following these steps:
- Determine your net worth. Add up the current market value of your assets, including cash, securities, personal property, and equity in your home, and subtract your liabilities, which include all debt, such as credit card balances, loans, and mortgages. Keep in mind that a high net worth doesn’t necessarily mean financial stability.
- Evaluate your cash flow. Determine your monthly income and subtract your spending (excluding savings and investments). If you have a positive cash flow, you have some financial breathing room. If you have a negative cash flow, you may be getting deeper into debt.
- Calculate your savings rate. Divide your monthly savings by your income (including contributions to retirement accounts). Most financial experts recommend a 15% savings rate but strive to save more if possible.
- Evaluate your insurance coverage. Determine what types of insurance you need to protect your home, health, income, and assets.
- Build up your emergency fund. Aim to have at least 3-6 months of living expenses saved in case of unexpected events, such as job loss or major car repairs.
- Plan for retirement. Use calculators to determine how much you need to save for retirement, and adjust your savings accordingly.
- Prepare for major expenses. If you know you’ll need to make a major purchase or pay for significant expenses, make sure you’re financially prepared.
By answering these questions, you can assess the health of your financial situation and make choices that enhance your financial well-being.