Check These 6 Elements of Your Financial Health

Budgeting, Personal Finance
Before You Build Your Budget, Check Your Financial Health

You stop and take your pulse after a vigorous workout — but how often do you stop and take the pulse of your finances?

“It’s important for everyone to do, whether they’re just starting out or they’re nearing retirement,” says David Kring, a certified financial planner and owner of Conestoga Wealth Management in Malvern, Pennsylvania.

Knowing where you stand is especially important before you set a new financial goal, make a plan to pay off debt or build a budget. It can help you decide what’s realistic and see whether you ought to prioritize other money goals instead.

How can you tell if you’re in good financial shape? Here are the areas to consider when assessing your finances — and what you should do once you know where you stand.

Your retirement savings

You won’t likely work forever, which means that one day, you’ll no longer have income the way you do now. That makes saving for retirement a top financial priority. The earlier you start setting aside money in a 401(k)IRA, or other retirement savings account, the better.

We recommend saving at least 15% of your income for retirement, with the aim of replacing about 70% of it when you stop working. At the very least, contribute enough to take full advantage of your company’s 401(k) match if it has one. Our retirement calculator can help you estimate the amount you should be saving and how close you are to your goal.

Your debt

Your debt load includes everything you owe, such as your student loan and mortgage balances. Not all debt is bad debt, but debt with high or variable interest rates can make you less secure. You’re doing well if you have no debt or debt that doesn’t disproportionately affect your daily decision making.

Once you quantify your debt load, make a plan to pay it off.

Your income

Your take-home pay, which is the amount you receive after taxes have been taken out, is the best measure of your income. The goal is to spend less than you earn.

“Spending more than you make is not sustainable,” says Patricia Seaman, a senior director at the National Endowment for Financial Education, a nonprofit organization specializing in personal finance education. If you’re running dry each month, consider how you can trim spending or make more money.

Your emergency fund

An emergency fund is a cash stash that you can draw on if you have an unexpected expense. Don’t have one? Start setting aside a little bit each month in a savings or money market account.

You should have at least three months of emergency savings in case of a financial hardship. If you prefer to start small, shoot for $500. Find extra money to pad your fund with our tips for how to save money on everyday expenses such as utilities and groceries.

Your credit score

Your credit score indicates to lenders how likely you are to pay back borrowed money. It’s based on factors such as your credit history and credit utilization, and it determines whether you’ll be approved for loans and other products, as well as the interest rate you’ll receive. You can get yours for free.

In general, lenders consider a score of 300-629 bad credit, a score of 630-689 fair or average credit, a score of 690-719 good credit and a score of 720 and up excellent credit. To build your credit score, pay all of your bills on time and aim to pay your credit card balance in full each month.

Your insurance

Depending on your assets and family situation, your insurance coverage might include car insurance, homeowners or renters insurance and life insurance. You might also want disability insurance considering that Kring says your greatest asset is “your ability to earn a paycheck.”

At the very least, you should have enough insurance coverage to protect against financial loss. That means your coverage amounts should be higher than the value of your major assets, such as your home, car and savings.

Starting line

Don’t be discouraged if you find you’re not as financially prepared as you thought you were. Now that you know where you’re starting, you know where to go next:

  • If your expenses currently exceed your income, create a balanced monthly budget.
  • If you have a high level of credit card debt, pay off small debts to gain momentum, then switch to knocking down the balances of high-interest cards.
  • If your savings are in good shape, think about investing.

And don’t forget to celebrate your little victories along the way. “Remember that it’s your journey and not anyone else’s,” says Seaman. “Try to keep focused on the progress that you’re making.”

Courtney Jespersen is a staff writer at NerdWallet, a personal finance website. Email: courtney@nerdwallet.com. Twitter: @courtneynerd.