What Are Your Financial Vital Signs?

Financial Vital Signs: A Green Heartbeat Line Symbolizing Financial Health and Vitality

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Credit Sesame discusses the financial vital signs of a finance check-up.

Having your physical vital signs checked regularly by a doctor is a good idea. Routine checks may spot a medical issue before it progresses to something more serious.

What if you want to do the same thing with your finances? What vital signs indicate that your financial affairs are in good shape? How can you tell if something needs attention before it goes too far to help?

This is the financial equivalent of checking your pulse, temperature, blood pressure, and other signs of physical health. Looking at how vital signs have changed since the last time you checked can help you take the proper steps to stay in good financial health.

Credit Sesame suggests that you regularly check the following financial vital signs:

  1. Savings rate
  2. Debt-to-income ratio
  3. Total debt
  4. Credit score
  5. Interest rate on debt
  6. Net worth

Below are descriptions of these financial vital signs and what you should be looking for in each case:

1. Savings rate

According to the annual Consumer Expenditure Survey by the Bureau of Labor Statistics, as of 2021, American consumers spend an average of 85% of their after-tax incomes. That means the remaining 15% is left over for savings.

That’s a pretty healthy savings rate, but it varies according to income. The top 20% of earners spent less than 70% of their after-tax incomes, meaning they could save 30%.

On the other hand, the bottom 40% of earners spent more than they earned in 2021. When you spend more than you make, it’s a negative savings rate. It means you aren’t saving any money and must depend on borrowing or some form of outside assistance to get by.

A negative savings rate isn’t sustainable. You can’t keep borrowing forever, and you may not always be able to rely on outside assistance to get by. A positive savings rate is healthier, and you should look for your savings rate to grow as you enter your peak earning years (typically, your mid-40s to mid-50s).

If you’re regularly spending more than you earn, look to cut expenses as much as possible. Also, look for opportunities to earn more. In a strong job market, many companies are not only hiring but are willing to train applicants. Adding new skills can be an opportunity to move into a better-earning career.

2. Debt-to-income ratio

This measures how much of your income is going to pay off debts. If debt payments consume too high a percentage of your income, there may not be enough left for other essential expenses. In particular, too much debt can hamper your ability to save for the future.

A debt-to-income (DTI) ratio below 35% leaves you with healthy financial flexibility. On the other hand, if more than half your income is going towards debt payments, it could put you at risk of missing a payment or being unable to meet other expenses. Between those extremes, a DTI ratio between 35% and 50% means you should be cautious about taking on any further debt.

If your DTI ratio is above 50%, you should work to bring it down as quickly as possible. Remember, besides paying off debts, refinancing can be used to reduce your DTI ratio. Refinancing is especially effective when you can reduce your interest rate.

3. Total debt

DTI ratio measures how much of a burden your monthly debt payments are. Total debt measures how much you owe.

Your total debt is a drag on your net worth and eats up some of your future earnings until it’s repaid in full. There’s an important distinction to be made between mortgage and non-mortgage debt. Mortgage debt is offset by an asset with lasting value, while non-mortgage debt is not.

It’s normal to have some debt, especially in the early part of your career. As your income grows, you should reduce your total debt – especially non-mortgage debt.

Your goal should be to pay off non-mortgage debt as you enter your peak earning years and all debt by the time you retire. While you need to keep up with all your debt payments, prioritize paying off the debt with the highest interest rate fastest. This allows more future payments to reduce what you owe rather than pay interest charges.

4. Credit Score

Your credit score summarizes how you’ve used credit in the past and how you’re using it currently. It includes things like how long you’ve been using debt, whether you’ve made your payments on time, how much you now owe, and your mix of loan and credit card debt.

It takes time to build a good credit history, so don’t be too upset if your credit score is not high at first. The most important thing is to keep your credit score moving higher over time. That shows you’re practicing healthy credit habits.

Monitor your credit score to see if you are gaining or losing ground. If your credit score declines, check your credit report to see why. Take steps to address whatever’s dragging your credit score down.

5. Interest rate on debt

If you have debt, it’s important to minimize the cost of that debt. This may entail an ongoing effort to reduce the interest rates on your debt.

Regularly compare the interest rates you’re paying with alternatives available on the marketplace. This tells you whether any of your interest rates are out of line.

If your interest rates are higher than other alternatives, refinancing might bring them down. In particular, refinancing from credit card debt to a loan or a zero-interest card could help you reduce your interest. Also, note that improving your credit score might qualify you for lower interest rates.

If you can’t find a way to lower your interest rates, at least prioritize paying your highest-interest debt down the fastest.

6. Net worth

This is the value of all your assets minus the balance of all your debts. Net worth is perhaps the most important of all financial vital signs because it measures your overall progress. The most important thing is ensuring your net worth grows over time.

Net worth is a better measure of financial health than simply looking at what you have. If you have expensive possessions financed by debt, you may not be getting ahead.

If your net worth isn’t growing, you should rethink your financial habits. Perhaps you’re spending too much. It may signify that you’re taking on the wrong kind of debt. Borrowing for something that has lasting value, like a house, can add to your net worth over time. Borrowing for shorter-term spending is likely to subtract from net worth.

The sooner you check your financial vital signs and act on what they’re telling you, the better your next financial check-up is likely to be.

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Disclaimer: This guide to buying a house and getting a mortgage is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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