How Financially Fit Are You? 4 Money Vital Signs to Track

Via LearnVest By Cathie Ericson

 

In this day and age, tracking our health stats has become as routine as jumping in the shower in the morning, or brewing that pick-me-up cup of coffee before heading to work.

We step on the digital scale, count calories via some flashy new app, and use pedometers to track the number of steps logged per day—all in an effort to make sure our health is on the up and up.

But what about your financial well-being?

The reality is that many people are as eager to keep daily tabs on their money as they are to be poked and prodded by a doctor.

But just as you should routinely check your vital signs to monitor your overall physical condition, you should also do the same for your fiscal health—by nailing down the four key money vital signs that make up your total financial health picture.

We show you how to run those numbers, and even offer up a points scale for each money vital sign, to help you assess whether you’re in the healthy zone—or if you might need to get on a financial fitness regimen, stat!

RELATED: What’s Your (Retirement) Number?

Financial Fitness Vital Sign #1: Emergency Fund

Remember when you were blindsided by an overheated car engine and a trip to the ER—within a week of each other?

Not only did the emotional stress likely catch you off guard, but the financial stress probably sent your budget into a tailspin too.

“When families or individuals who don’t [have an emergency fund] face an unexpected expense, they may have to borrow to cover the tab,” says Dennis Prout, a CFP® and founder of Prout Financial Design in Traverse City, Mich. “That can lead to a cycle of debt and financial insecurity—and make it difficult to save for the future.”

Are You in the Healthy Zone?

Unfortunately, 34% of Americans have no emergency savings, according to a 2015 survey by NeighborWorks America—essentially leaving a third of the country’s finances vulnerable to emergencies.

So how well prepared are you for a rainy day? Give yourself …

100 points if you have at least 6 months of take-home pay saved, based on the highest earner in your household
90 points if you have 3 to 5 months
80 points if you have 1 to 3 months
70 points if you have less than a month

In general, the more inconsistent your income and the more dependents you have, the larger an emergency-fund cushion you should have, suggests Matt Shapiro, a CFP® with LearnVest Planning Services. If you’re self-employed, for example, you might want to shoot for nine months of take-home pay.

Bottom line: People should have a minimum of one month’s worth of take-home pay in an emergency fund before they work toward any other financial goal, and eventually aim for somewhere between three and nine months.

How to Get Healthier

Prout suggests looking for “money leaks”—areas of your budget where you inadvertently spend more than you need—in order to free up emergency fund money.

RELATED: 5 Money Leaks That Could Drain Your 2015 Budget—and How to Plug Them

Do you pay for a subscription you barely use? Eat out one more day a week than you should? Those cost savings can be transferred to a high-interest savings account.

“Knowing how much to save is the easy part—actually making it happen is the hard part,” says Shane Sullivan, a CFP® and partner at Valhaven Wealth in Austin, Tex. “What my wife and I do is automatically transfer money from our main account to an emergency fund every week.”

This move helps make saving a given—and a no-brainer.

60% of credit-risk managers named high debt-to-income ratios as the top reason they’d be hesitant to approve a loan.

Financial Fitness Vital Sign #2: Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is a figure lenders use to gauge how well you manage your debt—and it’s math worth doing because it can affect your future financing.

To pin down your DTI, add up your minimum monthly debt payments and then divide the sum by your gross monthly income.

For example, if you pay $1,300 for your mortgage, $500 for your car, and owe a minimum of $200 on your credit card, then your monthly debt totals $2,000. If your gross monthly income is $4,200, your DTI is roughly 48%.

“In this case, nearly half of your income is ‘spoken for’ by outstanding debt,” Prout says. “I’ve seen people have to delay purchasing new homes or cars because their debt won’t allow it.”

Are You in the Healthy Zone?

As you may have deduced, the lower the DTI, the better—it’s an all-too-important consideration for lenders these days. According to a 2014 FICO survey, 60% of credit-risk managers named high DTIs as their top reason for concern over whether to approve a loan. So give yourself …

100 points if you have a DTI of 25% or less
90 points for 26%–36%
80 points for 37%–43%
70 points for more than 43%

Although there aren’t hard or fast rules for what counts as the “best” DTI, Prout advises clients to work on maintaining 25% or less. And a percentage higher than 36%, adds Shapiro, could mean having a hard time getting approved for a mortgage.

Meanwhile, the Consumer Financial Protection Bureau notes that, in most cases, 43% is the highest DTI a borrower can have and still qualify for mortgages with favorable loan features.

How to Get Healthier

It’s straightforward: Lower your debt or boost your income.

That said, reducing your debt is likely what you can tackle most immediately, so start by taking inventory of your debt in order of interest rate. Then consider paying off your high-interest credit cards and personal loans first, before embarking on a more aggressive plan to pay off lower-interest car loans and student loans, says Shapiro.

“Along the way you should also make an agreement with yourself and your spouse not to spend beyond certain limits,” suggests Prout. “For instance, maybe your rule is to wait 72 hours before making any purchase over $100.”

RELATED: Can’t Get a Mortgage? Debt-to-Income Ratio, Explained

Financial Fitness Vital Sign #3: Credit Score

Similar to a DTI, your credit score is another way lenders measure how likely you are to repay your loan—and a lower score usually means higher interest rates on everything from your mortgage to your credit cards.

And considering Credit.com estimates that the typical person pays more than $279,000 in interest over a lifetime, wouldn’t you prefer to keep as much of that in your pocket as possible?

Are You in the Healthy Zone?

Your FICO Score—the most commonly used credit score—ranges from 300 to 850. Although standards for what constitutes a good or bad score can vary by lender, give yourself …

100 points for a credit score higher than 750
90 points for a score between 720 and 749
80 points for a score 620 and 719
70 points if you have less than a 620

Since your numbers can vary by credit bureau, Sullivan recommends checking with all three (Equifax, Experian and TransUnion) to compare scores—and requesting free annual credit reports, so you can see what might be dinging your score with each bureau.

RELATED: 5 Simple Strategies for Taking Your Credit Score to New Heights

How to Get Healthier

MyFICO.com breaks down what comprises your credit score, but focusing on the two biggest factors can help move the needle north the furthest.

The first is your payment history, which makes up 35% of your score. So make all of your payments on time, says Shapiro. If mere forgetfulness is the culprit, put any bills that are the same each month, such as your rent or car loan, on autopay.

For bills that may vary, like credit cards, put at least the minimum on autopay. You can always pay more later, but this will help ensure you make on-time payments and avoid late fees.

The next big factor? Your credit utilization rate, which makes up 30% of your score. It’s determined by dividing all of your available credit limits by the actual amount of credit you owe.

The rule of thumb is to pay down your balances enough so that you keep your rate below 30%—of course, “the lower the number, the better your score,” Shapiro adds.

By your 30s, try to save at least 10% of your income, and in your 40s and 50s, shoot for at least 15%.

Financial Fitness Vital Sign #4: Retirement Savings

In their 2015 Retirement Confidence survey, the Employee Benefit Research Institute found that 64% of workers feel behind on their retirement savings.

Stats like this probably leave you wondering whether your own retirement will be more “early bird special” than “dinner at the steakhouse”—but you won’t know for sure until you crunch the numbers.

Are You in the Healthy Zone?

To determine if you’re on track, Shapiro recommends looking at your replacement ratio, or the percentage of your annual income you’re able to replace in retirement.

One guidepost is that you’ll likely need about 15% less than your current salary because you’ll no longer be making retirement contributions and may have Social Security benefits, which means a replacement ratio of 85%.

Plug your numbers into a calculator like this one; assume that you’ll retire at age 67 and will live until age 90, which means you’ll need 23 years of retirement income. Plug in 85% into the “income required at retirement” field.

The calculation shows how much you should be saving each month to meet those parameters. How does that compare with your current contributions? Give yourself …

100 points if you’re on track to replace 85% or more of your current income
90 points for 65%–84%
80 points for 40%–64%
70 points for less than 40%

How to Get Healthier

If these calculations stress you out, remember you’re trying to reach your figure with the help of compound growth.

So start contributing as much as you can—even if it’s just 2%–3% of your income. “Most people overlook [such a tiny percentage] because they think it’s not enough, but even that small amount can go a long way—especially if you begin to contribute to a 401(k) in your early to mid-20s,” Prout says.

And when you get a raise, boost your retirement contribution by the same percentage—and always take advantage of a 401(k) match if your company offers one.

By your 30s, Shapiro suggests trying to save at least 10% of your income, and in your 40s and 50s, shoot for at least 15%. As you get older and your children become financially independent, you may even be able to save upward of half of your income.

RELATED: 6 Signs You May Need to Revisit Your Retirement Plan

And the Results Are in …

Now add up your points and divide by 4. What’s your final score?

If you scored in the 90s, congratulations, you overachiever! You’re in excellent financial health.

In the 80s? You’re still a solid B student. Take a moment to look at where you can bolster your weak spots, but be proud of the progress you’ve made.

Stuck in the 70s? Don’t fret. Start with the small steps we’ve outlined above to chip away at your debt and boost your savings—and keep monitoring those money vital stats, so you’ll always have a finger on your financial pulse.

“Think of it this way: Many people who work out don’t always enjoy doing it, but it’s good for one’s health,” Prout says. “The same goes for saving. Once you get accustomed to it, it’ll become easier and more beneficial for you in the long run.”

RELATED: Are You Financially Healthy? The 3 Numbers You Should Know

LearnVest’s mission is to help people feel amazing about their money.

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