How to calculate your financial health?

Anyone who has begun earning should be conscious of their financial situation. As you get older and more responsible, your risk profile changes. Your financial health indicates how well you manage your finances. You can consider yourself healthy if you meet specific benchmarks. Therefore, your financial health keeps changing, and it is essential to continuously monitor it.

Financial health What does that mean and how can you measure it

What is financial health?

Your financial health reveals your financial situation, i.e., how well you manage your money. We consider your health to be good if you are free of disease and your body is in excellent condition. Similarly, some parameters can be used to assess financial health. You can consider your health to be good if you stick to these parameters.

Related: How To Check Your Bank's Financial Health

Below are the parameters to measure financial health:

Net worth - The first thing you should figure out is your net worth. Your net worth is everything that you own, minus your liabilities. For example, if you have Rs 1 lakh in your saving account, Rs 10 lakh in FDs, Rs 25 lakh in a retirement fund, and a car loan of Rs 5 lakh, your net worth will be calculated as below

(1 + 10 + 25 - 5) = Rs 31 lakh.

You have to monitor which direction your net worth is going. If your net worth is going south, you have a minus one for this parameter. If it is going north with time, you are doing good.

Saving rate - This is the percentage of your monthly income that you save. If you are earning Rs 50,000 and you are saving Rs 15,000, your saving rate is 30%. The rule of thumb is that you should save at least 20% of your take-home income. The more you save, the better you stay financially healthy. However, you should not compromise the quality of your life to save more.

Debt-to-income ratio - To calculate this ratio, you need to divide your monthly debt payments by your gross income. It tells you how much your debt is and whether you should take on more debt. Experts recommend the ratio should not be more than 30%. 

Credit Score - To know all the above parameters, you had to do calculations on your own. Your credit score is calculated by national credit agencies, not by you. It represents your creditworthiness; one of the key factors considered in establishing your credit score is how well you pay your bills. You can find your credit score through a variety of online platforms. Once you know your current credit score, you can track the direction. The higher the credit score, the better. It is ideal to have a CIBIL score of 750 or higher on your credit report. Having this score will help you qualify for credit cards and personal loans.

Retirement fund - One of the essential parameters in tracking your financial health is through a retirement fund. To figure out how much funds you'll need for retirement, use online retirement calculators. You need to give all your financial information, and it will tell you how much you need to have for retirement. It will also tell you how much you need to invest per month to achieve the amount. If you save the said amount, you are going well. If not, you will have to improve on this point.

Income - Last on the list, yet without it, none of the above parameters are possible. You need to ensure your income is growing every year, and it should be more than the average inflation rate in the country. It means your income should grow at least by 6%, with 10% considered good growth.

Ending Note

To sum up, you have to track all the above parameters individually and evaluate your overall financial health. The best part of financial health is that you can control it. You can bring discipline to your saving and investing habits, and you will see your financial health improve.

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