5 Metrics To Gauge Your Financial Health

Are you feeling like you’re treading water each month, or do you have plenty left over after the bills are paid? Understanding whether your finances are on track can be challenging, but there are key measures you can use to get a clearer picture of your financial health and how far you have to go to reach your goals.

Your Net Worth

Your net worth is one of the most straightforward ways to assess your financial health. To calculate it, add the value of all your assets (such as savings, investments, and property) and subtract any debts (such as your mortgage, credit card debt, and student loans).

Don’t be discouraged if you have a mortgage and your net worth is negative. Mortgage debt is widely considered ‘good debt’ due to its potential to generate future value through capital appreciation or rental income. While your net worth might fluctuate due to big-ticket purchases or market changes, it should ideally trend upward over time. Knowing this number can help you understand how much debt you can afford, what you can spend, and when you might be able to retire.

Your Debt-to-Income Ratio

Another vital metric to monitor is your debt-to-income (DTI) ratio, which indicates how much of your income goes towards servicing your debts. Calculate your DTI by dividing your total monthly debt payments by your gross monthly income. A high DTI ratio signals a greater debt burden.

Mortgage lenders often consider DTI ratios when assessing creditworthiness. A high ratio could signal risk and affect your ability to secure a mortgage. Keeping your DTI ratio in check is crucial for maintaining financial stability and accessing credit when needed.

Your Current Rate of Savings

Monitoring your monthly savings as a percentage of your income helps you understand whether you’re spending responsibly or living beyond your means. A common rule of thumb suggests saving 20% of your income. However, this may vary depending on your financial goals and income level. High earners aiming for early retirement might save more, while those with tight budgets might set more modest targets.

If you struggle to meet your savings goals, consider setting up automatic transfers to your savings account and reviewing your bank statements to identify areas where you can cut expenses. This proactive approach can make saving more manageable and help you build a financial cushion.

Your Emergency Fund

Having an emergency fund is crucial for cushioning the blow of job loss, medical scares, or other unexpected expenses. Aim to save enough to cover three to six months of living expenses. For extra peace of mind, consider saving even more.

Keep your emergency fund in a separate, high-interest account to reinforce that it’s only for emergencies and discourage unnecessary withdrawals. This strategy helps ensure that you have a financial safety net when you need it most.

Your Superannuation Balance

Your superannuation balance is a key indicator of your financial health, particularly for retirement planning. However, its significance varies based on your age and retirement lifestyle goals. If you’re early in your career, a lower super balance is expected, and market dips may be less concerning.

If you’re further along in your career and feel your super balance is lacking, consider salary sacrificing arrangements or making extra contributions from your take-home pay. You might also be able to claim these contributions as a tax deduction by submitting a Notice of Intent form to your super fund.

Taking these steps can boost your super balance and set you on a path to a comfortable retirement.

For personalised advice to help improve your financial health - book a call with our Life Sumo team today.

This provides general educational information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. Life Sumo (Orion Enterprises (Cairns) Pty Ltd) has representatives that are authorised to provide personal financial advice.