Your finances can affect many different areas of your life. If you’re not sure where you stand in terms of financial health, keep reading to find out.
What is “financial health” and why is it important?
Financial health can impact all facets of one’s life. Studies show that those who aren’t financially healthy are at bigger risk of developing mental health issues, and in turn, developing physical conditions like high blood pressure, heart disease, and even diabetes brought on by stress.
But what exactly is financial health? According to the University of Utah’s finance extension, “[financial] health is the feeling of having financial security and financial freedom of choice, in the present and when considering the future”. In short, being financially healthy means using your money in such a way that doesn’t cause stress, whether that stress comes from debts or from bad financial planning.
So how exactly can you tell whether you’re on the right track? Below are 5 factors that will help you determine whether you are financially healthy, as well as the steps you can take if you’re not.
1. Your debt to income ratio
A debt to income ration, or DTI for short, compares your monthly loan payments to your monthly income. It refers specifically to the portion of your gross monthly income (pre-tax) that is used to pay off debts like rent, a mortgage, credit cards, and other obligations.
In order to calculate your DTI, you must first add up all of your monthly debt payments. This includes things like your rent, mortgage, car payments, loan payments, credit card payments, and other types of debts. Then, you’ll divide that sum by your gross monthly income — meaning your income before taxes and other deductions — then multiply that by 100. The lower that percentage, the better.
For example, Susie has a gross income of $4000 per month. During that month, she has to pay rent of $1000, car payments of $300, student loans of $500, and credit card (minimum) payments of $500. That means that all of her monthly bills add up to $2300.
Susie’s debt to income ratio comes up to 57.5% ($2300 / $4000 * 100).
According to Nesto, you should aim to keep your DTI below 36% (including mortgage). Those who aspire to be homeowners should aim to keep it below 43% if they want to qualify for a mortgage.
2. Your credit score
A credit score is a three-digit figure that typically ranges from 300 to 900 and indicates to credit bureaus how reliable you are. They give creditors information about your propensity to make payments. Credit scores are determined using public information from lenders (banks, collection agencies, credit card issuers), such as your payment history, the total amount of debt you have, and the duration of your credit history.
Higher ratings demonstrate your reliability to creditors, while lower scores might result in their declining to loan you money. In Canada, the average score ranges between 650-725. But what exactly is a good credit score?
According to Equifax, one of Canada’s leading credit bureaus, the ranges are as follows:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800+: Excellent
3. The amount you have saved
Though savings might not seem like they’re all that important to you right now, they determine your financial health for a couple of reasons.
The first is that your savings are what will help you get through emergencies and unexpected expenses. For coping with an unforeseen expenses, having an emergency fund is crucial. Though experts recommend saving three to six months' worth of expenses, the precise amount may vary from person to person. According to Manulife, if you’re already paying down debts and are having trouble saving three to six months’ worth of expenses, an emergency fund that ranges between $2500 to $5000 should do.
Secondly, savings ensure that you reach your financial goals. After all, working just to be able to live isn’t really a fun way of living. You want to be able to do the things you’ve always wanted to do. Unfortunately, in many cases, doing so requires money. Having some money saved up put you in control of your life and can help you plan for your future and goals — short-term or long-term!
4. Monthly income versus monthly expenses
The amount you spend on your monthly expenses doesn’t really matter as long as you don’t spend more than you make. The rest depends on how you decide to budget your money. However, if you are constantly spending more than you make, you’ll risk getting into a lot of debts down the line. Even if you’re spending $100 dollars more than you make per month — that’s $1200 of debt by the end of the year!
If you find out that your monthly expenses exceed your monthly income, try to see how you can increase your income. But don’t worry — you don’t necessarily have to go looking for a brand-new job! Simply getting some extra cash to make up for the difference will do the trick. Find something you’re passionate about and see if you can make some money out of it.
5. You follow a budget
Budgeting not only aids in debt relief but also in preventing debt in the first place. But if you've never done it before, it could seem a little challenging. Budgeting also ensures that you have enough money to pay for your wants and needs. Though the thought of creating a budget might make you feel stressed, the benefits of having one will far outweigh that fear.
There are many different ways you can budget your money. There’s the 50/30/20 rule, zero-based budgeting, reverse budgeting, and the 60% solution. We recommend that you read through these different methods and see what works for you. After all, one isn’t better than the other — the important thing is that you find something you can stick to.
Not only will budgeting help you reach your financial goals, but it help alleviate any nefarious symptom that indebtedness may cause. And for that, there’s no better platform than Allevia! After inputting all of your expenses, income, and debts, Allevia will analyze your personal situation and will help you budget accordingly. It will even help you find solutions if you’re dealing with a lot of debts. And the best part? It’s absolutely free.
