Financial health is akin physical health. If you don’t know your vitals, it’s impossible to diagnose why you’re leaking money or if you are even making enough.
Highlights
- In the current scenario, a perfect example of a volatile financial world, it is essential to be completely aware of your financial health.
- Keep a tab on expenses, taxes, and savings is crucial to staying financially strong in difficult times.
- Calculating earnings as after-tax income, expenditure, retirement fund, net worth, and credit score are a few parameters of your overall financial health.
- Being on top of your finances is not a rosy task. Its an arduous, monotonous practice. But rewards are long-term.
Financial health is as important as physical health. While the general physical stats and vitals help medical professionals to ascertain the overall health, accountants require numbers to understand how to keep your financial health intact. Most illnesses come with clear symptoms that help treatment and recovery. But with finances, often its too late before an individual realizes and develops prudence.
The current global Covid-19 induced recession is the best example of financial volatility with unstable markets and dwindling micro and macro economies. Hence, it is essential to keep a tab on expenses, taxes, and savings to stay financially strong in difficult times. The first step is to understand how to calculate earnings as after-tax income. Expenditure, retirement fund, net worth, and credit score are a few ways of dividing your income and calculating the overall financial health.
Watch: What is Financial Health?
Here are 5 Ways to Ensure that you are aware and in good Financial Health
Being on top of your finances is not a rosy task. Its an arduous, monotonous practice. But rewards are long-term. A person in control of their financial health is seldom bogged down by rainy days and sudden economic depressions. Financial decisions can’t be impulsive and with half-knowledge. Therefore, it is crucial for all of us to be well-versed with some basic forms of accountancy and book-keeping to ensure we keep a count of every penny – earned, invested or spent.
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Income and Expenses
A look at your last pay stub can give a clear idea of the income after taxes. The next step is dividing your monthly and annual expenses in the most prudent way possible. The thumb rule to follow for budgeting is 50/20/30. Ideally, your primary expenses cover over 50 percent of the after-tax income. The other 30 percent is usually taken up by vacations and dining out. This means that most millennial professionals are left with 20 percent of the after-tax income for savings.
Furthermore, dividing the after-tax income with the number of hours worked helps you calculate how much you may have to work to buy a commodity worth a certain amount. While this enables making conscious buying decisions, it also helps curb unnecessary expenditures. Food, shelter, transportation, insurance, child care, and other responsibilities sum up the basic expenses. However, 30 percent of the income spent on vacationing, shopping, or other luxury items can be shifted back and forth along with the 20 percent parted to accommodate investments and savings as per individual choices.
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Lifetime Income and Net Worth
Invested income, pension funds, perks and benefits, incomes accrued as dividends or profits from investments, gifts received, and inheritances are a few things that add up along with annual earnings to constitute lifetime income. Like after-tax income, lifetime income has to be subtracted by debts, mortgages, loans, and credit card debts from the earnings mentioned above to derive net worth.
It would be a good idea to keep the lifetime income higher than any liabilities to ensure a higher net worth.
This means it is crucial to save more. It is equally important to have an idea of the approximate lifetime income you are likely to end up with. For this task, an accountant pal or an online lifetime income calculator can give you an exact idea. The next step is to save, invest or loosen your purse, rest assured that you’re on the right track.
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Retirement and Social Security benefits
To avail 100 percent of the social security benefits, you need to avail the benefits at the right time. If availed too soon, you will end up settling for reduced pay. Similarly, availing them too late, i.e. after the retirement age, you might not use up the credits until you reach 70 years of age.
Watch: How to make Social Security and Retirement benefits work together
A study by JP Morgan gives an idea of what millennials can do to meet their retirement targets by age 67 if they start earning by 25. It is essential to consider the estimated benefits of the social security statement to understand what to expect from social security. The US Government’s social security calculator gives an idea of what to expect and how much to save.
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Retirement Savings
It is crucial to plan for your retirement while you are still earning. Planning well ahead for savings and managing to close the mortgages and credit card payments as early as possible will help you prepare for retirement. A good credit score and timely payouts of financial liabilities will ensure a comfortable life after retirement without much financial hassle or challenges.
A good way to begin controlling your individual retirement finances post decades of work-life is to calculate the average amount of monthly and annual expenditure required. Once you do this you’ll have an idea of what you’ll need when you retire. The next step is to try and close the gap as much as possible to ensure a good standard of living post retirement.
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Credit Score
A good credit score enables you to look good on credit applications. Your debt-to-income ratio is crucial when achieving the big things in life. Having a handsome credit score will allow you to look good in the number books. Calculate your monthly debt payments, rental dues, outstanding credit card payments and loans etc. against your monthly income to ascertain the debt-to-income ratio.
Generally, a debt-to-income percentage of 36 percent or less is considered good enough by lenders. Paying off some outstanding debts is a good idea if you are in the 36 to 50 percent ratio bracket. A good credit score also enables you to qualify for any new loans. This comes handy for upgrades you may be considering to enhance the quality of life. You might be planning to send yourself or your kin for premium education.
Managing a good balance between an after-tax income and expenditure is the first step towards good financial health. You have to be aware and in control your financial vitals. This includes a good credit score, retirement savings, and the social security benefits after retirement. In addition, a decent amount of net worth, and balancing out the after-tax income with the expenses while you are still earning are also important pointers to ensure for a healthy financial life.
