Ways to Track Your Financial Wellness

Track Your Financial Wellness and Increase your Retirement Preparedness

Track your personal finances regularly. Seb Oliver/Getty Images

Is your retirement plan on the right track? Most people answer that question with a “no confidence” vote while others acknowledge they aren’t sure whether or not they will be able to fulfill their retirement goals because they are too overwhelmed with current financial priorities.

According to a recent report, only 19% of employees reported feeling confident they are on track to reach their retirement goals.

Other findings from the National Retirement Risk Index suggest that 52 percent of U.S. households are at risk of not being able to replace their current lifestyle expenses in retirement.

No matter what your financial goals may be or the time horizon to reach your planned destination, it is essential to understand how to assess the progress you are making toward important financial life goals.  This is where it is necessary to take a big picture view of your total financial situation and focus on improving your overall financial wellness.

Ways to Assess Your Financial Wellness

Financial wellness consists of more than just our perceptions and feelings about our own financial health. The concept of authentic financial wellness is measured by a combination of factors including the overall satisfaction with our current financial situation, actual financial behaviors (i.e., budgeting, saving, paying off credit card balances in full), financial attitudes, financial knowledge, and objective financial status.

A thorough examination of the final component of financial wellness, actual financial status measures, is an effective way to assess financial well-being because it helps us see exactly how we are doing financially speaking.

Here are some of those same important financial calculations you can use at least once per year to examine how you are doing:

Track your net worth. A net worth analysis is an ideal way to start assessing your current state of financial wellness. This is a simple breakdown of your assets, everything you own, and liabilities or everything you owe to others. Then, subtract the liabilities from your assets and you will have determined your actual net worth.

Although your net worth is just a piece of your life story, every single item on a net worth statement has an influence on your financial health. Putting these pieces of your financial life together is a good start in gaining a true sense of awareness about where you are today. If you do not have a solid understanding of your current net worth situation, you can assess your net worth using this spreadsheet or using account aggregation sites such as Mint or Personal Capital.

Calculate your funds available for emergency savings. The emergency fund or “safety net” account is sometimes referred to as a basic liquidity ratio. To calculate your assets available for emergencies, simply take a sum of your liquid assets such as cash, savings, or money market accounts (cash equivalents) and divide that amount by your total monthly expenses. You may also include health savings accounts in this calculation just because health related expenses are a potential emergency.

Just use caution if your HSA is a big proportion of your overall emergency savings.

The basic liquidity ratio will reveal how much you have in available emergency funds. For example, if someone has total emergency savings of $12,000 and their basic living expenses are $4,000 per month, they would be right within the suggested window of having at least 3 to 6 months worth of basic living expenses ($12,000/$4,000 = 3 months). However, if the same person has $2,000 in savings, that’s obviously a different story and the emergency fund would only last a couple of weeks ($2,000/$4,000 = 0.5 months).

Here is an example of an emergency savings calculator that helps you see how much would typically be recommended for your safety-net account.

Determine your Debt-to-Income ratio.  The debt-to-income ratio shows how much of your income is dedicated to paying your monthly debt obligations.

These debt payments may include monthly housing costs (principal, interest, taxes, and insurance), student loan payments, required minimum credit card payments, and other monthly loan obligations (e.g., auto loans and personal loans). Most people only pay attention to their debt-to-income ratio when seeking a mortgage. Although it doesn’t always make sense to borrow up to the maximum amount possible to qualify for a mortgage, many lenders will usually allow you to have a debt-to-income ratio as high as 43%.

In general, most financial planners recommend keeping your debt-to-income ratio below 36%. So let’s assume your monthly income is $6,000 per month and you have a $2,000 mortgage payment, $750 student loan, and $250 credit card payments. The total monthly debt obligations divided by monthly gross income (before taxes and other deductions) will look like this:

Debt-to-Income Ratio example: $2,750 ($1,750 + $750 +$250)/$6,000 = 45.8% (exceeds the 36% target goal)

Calculate your ratio of savings to income. The savings ratio or personal savings rate is your total savings divided by total income. This important financial ratio helps assess your total savings as a percentage of your total income. You may choose to examine this on a monthly basis or annually if you have irregular savings due to bonuses or other seasonal income. In order to calculate your savings ratio, simply take your total savings (regular savings accounts, 401(k), IRAs, mutual funds, ETFs, HSAs, etc.) and divide this amount by your total household income. Rather than provide a benchmark, my guidance here is to save as much as possible based on your own unique goals.

There is little doubt that the best way to track how you are currently managing your personal finances is to create a personal spending plan or budget. But as you see from the examples above, there are other ways to assess your financial wellness with a brief progress report. These important financial calculations directly influence your goals and provide more than just financial awareness. These financial ratios help provide an objective way to track your progress toward important life goals such as retirement.