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How to Evaluate Your Financial Health in 5 Steps

Financial health doesn’t need to be an abstract concept. And, if you ask us, it shouldn’t be. Like taking care of your body and mind, financial well-being isn’t exclusively for the rich. It’s true, you can check up on your financial health and take steps to improve it starting today.

Evaluating Your Financial Health
Books folder file with medical data and stethoscope isolated on white background

Why Is It Important to Evaluate Your Financial Health?

Simply put, you can’t fix what you don’t know is broken. Maybe you feel a little, or even a lot, uneasy about your finances. Or maybe you don’t even realize the true state of your money. Until you write it down, map it out and see the entire picture, you likely won’t be able to chart a navigable course to calmer waters. By spending time on your finances today, you can sort out debt, tackle savings, and improve your financial well-being for tomorrow.

5 Steps to Evaluate your Financial Health

Now that you understand the importance of evaluating your financial health, let’s talk about what that actually means and how to do it. Here are 5 steps to evaluate, and eventually improve, your financial life:

Step 1: Assess Your Net Worth (or How Much Money You Actually Have)

Calculating your net worth is the first place to start when sorting your finances. The term net worth may sound like something only business tycoons and celebrities think about but, every single person has a financial net worth. Do you own a home or cars? Do you have a 401(k) or pension plan? Let’s calculate your net worth! Here’s how:

  1. Write down the value of every large thing you own. This can include cars, cash in checking and savings accounts, investments like retirement accounts, the current value of your home or other real estate holdings. It can even include that vintage baseball card collection in your basement. (Don’t include your income as an asset. We’ll talk about income later.)
  2. Now do the same thing with your debt. Debt can be credit card balances, medical bills, the amount you owe on your mortgage, outstanding home equity lines of credit, auto loans and student loans.
  3. Finally, subtract the total debt from the total assets. This number is your net worth.

Don’t panic if your net worth is a negative figure. Remember, this is step one of your very first financial health evaluation. Things can and will improve from here. This step alone puts you on a clear path to financial well-being.

Note: If you’re paying your mortgage on time, you’re already on the right path. Each payments means you own more of your home and, therefore, increases your net worth. The same goes for every time you pay down or pay off a credit card. 

Step 2: Calculate Your Debt-to-Income Ratio

Don’t worry, this one requires more simple math. Your debt-to-income ratio is how your monthly debt obligations, like a mortgage or rent plus car payments and loan or credit card payments, compare to your monthly income.

If you already have a monthly budget, the numbers needed for this calculation are likely at your fingertips. List out each of your monthly debts on a separate line. Here are some of the more common monthly debt payments:

  • Mortgage/rent payment
  • Car payment(s)
  • Student loan payment(s)
  • Medical bill(s)
  • Credit card payment(s)

Add up all those recurring monthly payments and divide by your gross monthly income. Move the decimal two places to the right. This is your debt-to-income ratio.

A debt-to-income ratio is one of the primary factors in calculating your credit score. Most financial experts and lenders recommend a ratio of 30 percent or lower.

If your debt obligations take too much of your current monthly income, you might consider a part-time job or a side hustle to get the ratio into a manageable range. 

Step 3: Set Your Goals

Where do you want to be at the end of next year? How about in 10 years time?

Hockey legend Wayne Gretzky once said, “You miss 100% of the shots you don’t take.” The same is true of setting goals. Whether you want to pay off your credit cards or have your sights set on something bigger, you can’t plan, prepare and work toward these goals until you set them. Write them down or post them on social media. Hold yourself accountable for the future you want to build for yourself and your family.

Step 4: Make or Update Your Budget

If you have a monthly budget, give yourself 10 points and a pat on the back because you’re already one step ahead of 65% of Americans, who couldn’t tell you what they spent last month!

Even those with a budget could benefit from updating their spreadsheet more often. To really stay on top of your finances, spend 5 minutes every day logging into your bank account(s) and credit card sites, and update balances on your budget. It might seem obsessive, but this simple daily routine can save you a lot of financial stress.  It’s important to know where you stand, what’s coming and going from your accounts, and what your credit card bills will be next month.

Another positive of having a budget and updating it regularly is seeing in real time where your money is going, so you can answer important financial questions like: 

  • Do I spend too much on eating out or ordering in?
  • Can I afford my car or should I trade it in for a different one with a lower payment?
  • Should I consolidate my debt into a single payment with a lower interest rate?

Once you answer these questions, you’ll be able to think clearly about whether your spending aligns with your goals and current income level. Then, you can make any necessary adjustments.

Step 5: Save for the Future

By the time you’ve gotten to this point in your financial health evaluation, you may think that you can’t worry too much about the future, that you don’t have the money to get through this month, let alone 10 or 20 years from now. But if you truly want to achieve financial well-being and hit your goals, thinking and planning for tomorrow is critical. Otherwise, you may be on the financial hamster wheel forever. Think about your financial future in two parts:

Later — Your Retirement

Saving for your retirement is the easiest way to improve your long-term financial health. If your employer has a 401(k) or 403(b)(7) retirement plan, consider contributing at least a level or percentage that earns you the full employer match. This money will come out of your paychecks before taxes, reducing your taxable income. And, because that money is taken out prior to you receiving your paycheck, you’ll get used to it not being there.

Now — Your Savings

If you’re living paycheck to paycheck and have a high debt-to-income ratio, the idea of putting money into a savings account might seem counterintuitive. Most don’t think twice about those $5 drive-thru coffees or $10 takeout lunches, though. Try skipping at least one of each of those every week, and instead putting that money into a savings account. Doing so could yield nearly $1,000 in savings every year. That’s a tidy little nest egg to start with, and once you see the impact of those weekly decisions, you may want to shift more money away from unnecessary expenses into building a secure future and improving your financial health. 

Read more: What You Need to Know About Consolidating Your Credit Card Debt

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