July 27, 2023

Main Measures of Financial Health

Sticking to a workout plan or diet regimen involves time, discipline, and progress tracking. Sticking to a financial plan is quite similar. However, there are many different measures out there to “track” the success of your financial plan. Finding a measure to determine how well your financial plan is performing can be quite difficult, even overwhelming. This blog seeks to debunk a few commonly used measures of financial health, while at the same time focusing on a few measures that can be a good sign towards ultimate financial freedom.

What you track can really determine how efficiently you use time, and what results come. Here is a video we did on this topic: https://www.youtube.com/watch?v=NNoFaqUo7og


Here are a few common financial health misconceptions:


  • A Perfect Credit Score


Many will conflate a credit score in the 800s as a clean bill of financial health. While having a perfect credit score is by no means a financial deterrent, generally speaking, there aren’t too many additional benefits to having an 850-credit score. No products or loans on the market exist for those with a perfect score. Generally, any credit score above 770 receives a clean bill for financial health and most credit offers for house, car purchases, etc.

Learn more about how to utilize credit card points to travel and spend as efficiently as possible:



  • Visible Assets (Home, Car, Boat, etc.)


It’s easy to drive past a large home or a fancy car and think that the person living there or driving it is set financially. While that may be the case, simply having a large home or expensive car is not solely indicative of strong financial health. A lot of times, it can mean the opposite. Many Americans default to working in a job they don’t like to buy stuff they don’t need to impress people they don’t like. A good financial plan can flip this default mode into a life by design, and not by default.

For a home payment, a general rule of thumb to keep in mind is to ensure that one’s total monthly housing costs (between mortgage payment, homeowner’s insurance, and property taxes) do not exceed 30% of one’s net take-home pay. In practice, someone could live in a home where their housing payment eats up more than 30% of their take-home pay, potentially putting stress on their other savings goals (retirement, education, etc.).


  • Renting vs. Ownership of Primary Residence


A common misconception often seen in financial planning is the idea that renting is “throwing money away,” and owning a home outright is the key to financial freedom. While there are certain cases where that could ring true, there are a variety of renting strategies that can lead to successful financial health if you “invest the difference.” Here is a video that explains why renting can sometimes be a better financial choice than buying a home:


Ultimately, here are a few measures of financial health that we believe to be applicable and where to focus:


  • Debt-To-Income Ratio


Having a manageable amount of debt pursuant to one’s income is crucial for sustained financial health. The debt-to-income (DTI) ratio divides monthly debt payments over gross income and is usually one of the first items a lender will request upon any application. Keeping this metric under 30% is generally advisable, provided the type of debt is managed properly.


  • Having A Solid Grasp on Monthly Cash Flow and Spending


One of the best steps to keeping a financial plan on track is controlling one’s “money temperature,” or having a clear understanding of monthly cash flow. Ultimately, this doesn’t mean tracking every expense on an Excel sheet. A good strategy to implement to help organize savings and spending is reverse budgeting. On a high level, reverse budgeting divides monthly expenses into two categories: fixed expenses and variable expenses. All fixed expenses should be sent to a fixed checking account and auto-draft at the beginning of every month (mortgage payments, insurance premiums, fixed savings/ investments into the future, etc.). Then, any remaining pay that is “leftover” from paying the fixed expenses can be sent to the variable checking account, meant to be spent to $0 each month. This better allows for guilt-free spending in the variable account, knowing that all obligations are being met out of the fixed account. Reverse budgeting can be a valuable tool to systematize month-to-month operations.

Here is a video that explains reverse budgeting: https://www.youtube.com/watch?v=s768NzYKcu8


  • Net Worth Tracking


Keeping an updated net worth counter has been one of the best ways to track financial health for decades. Tracking how your assets compare to your liabilities can help manage how much debt you may be taking on versus how much your accounts may be growing. Let’s assume a family has $50,000 in cash, $500,000 in investments, and a $1,000,000 home. Further, they owe $500,000 in an outstanding mortgage balance. Their net worth, in this case, would be $1,050,000 (the sum of their assets less the sum of their liabilities). Net worth tracking is relatively easy and is generally a good way to gauge how one’s financial health is trending.


  • Savings Rate


Generally speaking, a higher savings rate will equate to stronger financial health. Consider your savings rate to be the amount you save each month over your monthly income. As an example, if monthly income is $10,000 and monthly savings are $2,000, then one’s savings rate is 20%. A general rule of thumb is to keep this number at 20% or higher, but this rate should ultimately be calibrated specific to one’s personal financial situation.


  • Proper Risk Management Planning


Even the best-laid financial plans can be thrown off by risk. An individual or family can be doing all the right things from a financial planning standpoint, but if correct risk management planning is not addressed, it could all be for nothing. Ensuring the correct amount and type of life, disability, health, and umbrella insurance plans are put in place is vital to financial health and, ultimately, financial peace of mind.

If you have questions regarding how well your financial plan is on track, please consult with a trusted financial advisor.

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