April 24, 2019
When was the last time you checked your financial health?
April is a good time to take your financial vital signs. It seems exceptionally apropos as we just finished tax season which is always a major reality check.
First introduced in 2003, the initiative started as an effort to teach people how to establish and maintain healthy financial habits as so many in the U.S. have a true issue managing their personal finances.
Sound familiar? This is backed up by some surprising statistics. 70% of us live paycheck to paycheck. 40% can’t afford a $400 cash emergency, with 1 in 3 people having not a single dollar in retirement savings, and the average household $16,000 in debt. So if you found yourself short right at or after tax time, now is the perfect time to take stock and get better control of your financial future.
Shannon McLay, a former financial advisor at Merrill Lynch, founded and launched The Financial Gym in 2017. While McLay had a thriving practice in her previous positions, she also met with “pro bono” clients who didn’t have assets. McLay’s side gig led to an aha moment when she shared a financial plan with a client who remarked, “You know you’re saving my life, right?”
The incident created the impetus for McLay to create The Financial Gym to serve a wider range of individuals and services for the average person, specifically women, to reach personal financial health.
According to McLay, there are five key numbers that will decipher your financial health and get you on the road to gaining better control over your finances. Take the test and see how you do.
Increase The Amount Of Savings + Emergency Savings You Have Available
McLay recommends clients save a minimum of 15% of their gross monthly income. The best way to hit this goal and establish good habits is by creating an auto draft from your checking to your savings account for this amount every month.
To ease the pain, my recommendation is to divide the amount out based on whether you have weekly or bi-weekly pay periods. Because emergencies happen, your first savings goal is to save between 3 to 6 months of your monthly fixed expenses in a savings account. If you have $3,000 per month in bills you have to pay whether its rent, student loans, car payments, etc. then you should have between $9,000 and $18,000 saved.
If it’s a major hardship, try a longer savings period to tackle the goal. I personally did this system for my first five years in the workforce. I certainly had my rainy days but also had major piece of mind. I will admit I often wondered how others were doing so much better than me. The answer. They weren’t saving.
Watch Your Credit Score
You probably already know this. A financially healthy credit score is a 750 or higher. This means you have excellent credit. If you have a score below this, the good news is that credit scores are not permanent and they are fixable. Make a habit of looking up your credit score every three months (yes, they frequently change) and make sure all outstanding credit actually belongs to you. You don’t want to be penalized for someone else’s’ debt being attached to your creditworthiness. This actually happened to me and it was critical that I addressed the situation early on before it snowballed.
Improve Your Credit Utilization Rate
Experian defines the Credit Utilization Rate as “the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available.” In other words, it’s how much you currently owe divided by your credit limit. McLay explained, “Improving your credit utilization or the amount that you have on your credit cards versus the amount of credit you have available is a great way to quickly improve your credit score.” You should try to keep your credit utilization number below 35%, so if you have a credit card with a $1,000 limit, then you should have no more than $350 on your card at any given time.
If you find yourself in that situation, the two easiest ways to improve your score are to keep balances low on credit cards and other revolving credit. High outstanding debt can affect a credit score. Secondly, pay off debt rather than moving it around.
Calculate Your Debt To Income Ratio
This is another important number you need to know. It represents the amount of debt or fixed payments you have to make every month divided by your gross monthly income. If you have $1,200 in debt payments every month and you make $4,000, then your debt to income ratio is 30%. A healthy debt to income ratio is anything less than 35%. Why is this important? It depends on your short-term and long-term goals. If buying a home or an apartment is a life goal for you, McLay explained, “most lenders will not approve a mortgage if your debt to income ratio is higher than 43%.” Take the time to figure this out and match your results against your financial goals.
Start A Taxable Investment Account
Everyone knows they should have a retirement account to save and invest for retirement; however, McLay says one of the things she often observes is “we do not see enough clients investing for life goals between now and retirement which could be up to 30 years for some people.”
Although it seems a long way off, McLay advises, “Money that you don’t have earmarked for a life goal (in the next two years) should be invested, not as aggressively as your retirement account but more aggressively than your bank account. You may be afraid of losing money; however, if you make less than 1% in your bank account and inflation is 2-3%, then literally your worst fears are happening already.”
It’s sobering information. You are losing 1-2% of the value of your money every day. Investing gives your money a work out and helps protect you from inflation, the silent money killer.
Finally, McLay advises, “It’s really important to not let the digits of financial health cause you fear or alarm. Everything we do financially is fixable, it’s just a matter of how much work and time it may take to fix it.”