Monitor Your Financial Health
Every year, you manage your health with an annual physical, eye exam, and diagnostic tests to monitor the wear and tear on your body and identify potential opportunities to strengthen and improve your overall health. Are you giving your financial health the same attention?
When it comes to your physical health, there are prescribed objectives based on your age, gender, and family history. Setting objectives for your personal finances is equally important, using similar factors. Are you financially healthy right now? To answer that, you need to measure where you are versus where you want and need to be to enjoy a healthy financial future.
Useful tools for monitoring financial health include:
- Understanding Net Worth
- Managing your Debt
- Monitoring Spending Habits
- Understanding Market Trends and FICO Score
- Life Changes and financial impact
These tools let you see whether you’re meeting your financial objectives. They help you identify what’s working, and where you need to improve. Now, let’s dig a little further into each tool.
Know Your Net Worth
Your net worth is the difference between total assets and total debt. This will vary based on a number of factors including where you are in your career, how recently you made a major purchase like a home, and market fluctuations. Also significant are marital status, and where you are in the cycle of life. Are you married or single? Of child-bearing age? Have or want children? Although these factors don’t directly impact net worth, they do contribute to present and future savings, investments, debt, and the amount and type of insurance you carry.
In order to fully assess your net worth, you should make two lists. List one is your assets:
- Current value of your home
- Cash assets
- Other significant assets (vehicles, boats, vacation homes, etc.)
List two is your debts:
- Mortgage balances
- Loan balances
- Credit card debt
Are You Managing Your Debt?
First, establish a baseline so you can track what’s working, and what isn’t, based on increases or decreases in net worth over time. Catching a downward trend early allows you to act sooner rather than later, to protect and strengthen your financial health. How?
Step 1, perform an annual review of:
- Net Worth
- Mortgage rates
- Credit card interest rates
Step 2, compute your debt-to-income ratio by totaling monthly payments for:
- Credit cards
Divide this total by your monthly gross income. While experts vary on what constitutes financial health, a debt to income ratio of 20-30% or less is a healthy goal. Though the numbers you use in this calculation only represent a moment in time, you can use them to determine how well you’re managing your debt, as well as how to improve your credit score, and borrowing ability. Excessive debt tells its own story. It is the first place to look if your net worth is trending downward. This, however, is only part of the picture.
Optimize Your Spending Habits
Keeping track of your spending habits allows you to monitor and control your debt-to-income ratio. You can do this by entering all cash payments, debit, and credit card charges into either a spreadsheet, or budget and expense tracking program such as Quicken, Mint, or YNAB.
The advantage a tracking program gives you versus a spreadsheet is it links directly to your bank, and credit card accounts, minimizing the time you spend entering transactions. It also lets you automatically categorize expenses, giving you up-to-date information about spending trends, and generating a Profit and Loss Statement.
The experts at HKMP can help you determine which method will be the most effective and efficient for your activity and needs.
Knowing your monthly transactions allows you to create a budget to:
- Manage essential and non-essential spending
- Create a savings plan
- Create a plan to reduce debt
- Adjust your plans as variables change
- Review interest rates on debt to pay off higher interest accounts first, or determine where refinancing could save you money
Understand Market Trends and FICO
Mortgage interest rates have fluctuated dramatically since 2000, influenced by everything from Presidential elections to COVID, and the 2008 real estate crash. According to Freddie Mac, the annual average for a 30-year fixed rate loan in 2000 was 8.05%, vs. 2.96% in 2021. Re-financing a higher rate loan may be attractive since mortgage rates have dropped every decade. However, with the increase in applications due to COVID, lenders can set higher standards.
In order to ascertain if refinancing would improve your financial health enough to justify the effort, it’s important to educate yourself on whether your debt-to-income ratio and credit score (FICO) meet current requirements.
Most banks and credit card companies allow you to check your FICO score as often as you’d like without affecting your credit. If you’re considering refinancing, or making a large purchase, it’s a good idea to check your score regularly, see how it’s trending, and review the factors affecting your score. It’s another valuable tool for gaining insight into improving your financial health. In addition, by obtaining a credit report at least annually, you can monitor your credit card activity, review listing of secured and unsecured accounts held in your name, inquires of credit institutions and other alerts which can affect your credit score .
Financial Health and Major Life Changes
Awareness of your financial health allows you to develop healthy spending and saving habits, so you can meet current and future needs. When you monitor trends, both personal and external, you’ll know when it’s best to invest in assets, or pay off current debt to improve your net worth. In addition you can pro-actively protect yourself and your family from unexpected emergencies.
Many factors affect your personal financial health:
- Home and car purchases
- Number of years to retirement
- College Tuition
Unanticipated expenses, and fluctuating markets are a reality you can’t control. Monitoring and managing your debt and spending is to your financial health like the daily vitamins you take for your physical health.
Need a financial check-up? Reach out and let HKMP help you implement a plan to ensure a healthy financial future.