Financial health check

Training 105 minutesfinancial health check

You are 38, a pharmacist raising a son on your own. You earn $4,000 a month and things seem fine. But what does fine mean? Let us run a five-number check-up, like at a doctor’s.

Training goal: Know your numbers, fix the weak spot

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Situation

1. Number one: net worth. You have $6,500 in accounts, a car worth $8,000 and $9,000 of debt.

Count only the bank balance: $6,500
Add assets, subtract debts: $5,500
Skip it, the number will be upsetting

2. Number two: savings rate. You put aside $300 out of $4,000.

7.5% is fine, change nothing
Raise it to 12%: $180 more by cutting two subs and taxis
Jump to 30%, cut everything

3. Number three: debt-to-income. Car and card payments total $1,100 a month.

Take another loan for renovation, the bank approves
27%, above 20%: send extra to the 24% card
Pay the minimum, debts can wait

4. Number four: emergency fund. Essentials cost $2,600 a month and your savings account holds $2,000.

Target 3 months, $7,800, add $300 a month
$2,000 is enough, there is a credit card
Put the $2,000 into stocks for a better return

5. Number five: protection. You are the only earner, with no life insurance and no will.

Get term life cover and name a guardian
Put it off, you are young and healthy
A savings-type life policy at $250 a month

What you will learn

Net worth = what you own minus what you owe
Aim to save 10 to 20%, keep debt payments under 20%
A 3 to 6 month cushion, and cover for anyone who depends on you

Your real-life step

Work out your five numbers: net worth, savings rate, debt-to-income, months of cushion and protection. Pick the weakest and take one step.

Questions and answers

How do I check my financial health?

Look at five numbers: net worth, savings rate, debt-to-income ratio, emergency fund size and insurance. Repeat the check yearly.

What is a good debt-to-income ratio?

Many lenders accept total debt payments up to 36% of income, mortgage included. For consumer debt alone, under 20% is comfortable.

What percentage of income should I save?

A common target is 10 to 20% of income. With big goals or a late start, more.

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Numbers are illustrative. A game, not financial advice.