When you go to the doctor, the first thing they check is your vital signs: your temperature, blood pressure, heart rate, and other metrics that tell them if you’re in trouble. Tracking your vital signs is one of the best ways to make sure you’re healthy.
It’s the same with finances. Metrics help you monitor your fiscal health in the same ways.
Today we’ll talk about what some of these financial vital signs are, how you can measure them, what they’ll tell you, and ways to improve them.
1. Daily Spending
This is what it sounds like: How much money did you spend today? Include both things you actively spent and automatic transactions from your accounts and cards.
Knowing this number is essential for two reasons. First, it helps you catch spending you’ve forgotten about or stopped noticing because it’s automatic. Second, it gets you in the habit of paying attention to your spending habits.
- Measure It: Keep receipts daily, and check your accounts for other expenditures.
- What You Can Learn: The difference between what you think you spend and what you actually spend.
- Improve It: Choose one kind of routine transaction to cut in half or eliminate.
- Simplify: Change your money flow by using one debit or credit card for your expenses to make it easier to track everything.
2. Debt-to-Income Ratio
Your debt-to-income ratio is how much money you have to pay on debt each month compared with how much money you bring in, expressed as a percentage.
For example, if you get $5,000 a month and have minimum payments on your mortgage, car loan, and credit cards totaling $2,000, your debt-to-income ratio is 40%.
This number is important for getting more credit because lenders look at it when deciding whether or not to approve you and how much interest to charge. It’s also essential for you because it gives you a general gauge of how deep you are in debt.
- Measure It: Total your monthly minimum payments on all debt, then divide that number by your monthly income.
- What You Can Learn: How close you are to the normal acceptable ratio of 36% or lower.
- Improve It: Pay off low-interest credit cards or loans aggressively to remove their minimum payments from your monthly debt.
- Simplify: Consolidate debt onto low-interest cards, a home equity loan, or a similar low-interest option.
3. Credit Score
Your credit score is a numerical rating that ranges from 300 to 850. It represents how safe it is to loan you money, based on a variety of factors. Of all the items on this list, it’s probably the one you’ve heard of the most while checking the least.
It’s important to know your credit score because it’s how you get access to more and better credit. Even if you don’t use it often, knowing it helps you make the big money moves that can change your life for the better. For example, it can give you a good idea of when it’s time to buy a home or consolidate debt, or what level of help you can give a college-bound child.
- Measure It: You can order a free copy of your credit report annually from each of the three major credit bureaus. This is the law, and you should take advantage of it.
- What You Can Learn: How well you qualify for loans you might want or need and how healthy your current relationship is with credit.
- Improve It: Different credit score problems have different solutions, but paying your bills on time and keeping your credit cards below 30% of their limit are the fastest, most accessible solutions.
- Simplify: Many banks and credit cards offer real-time credit score checks as part of their online banking.
4. Emergency Fund Amount
If you had a $1,000 emergency expense this month, would you have to borrow money if an unexpected expense arose? How long can you survive on savings if your job disappears tomorrow? Emergency funds exist to make the answers to those questions less scary.
An emergency fund represents liquid cash you have in reserve to get you through an unanticipated rough patch. According to a Bankrate survey, nearly 40% of Americans have less than $1,000 in theirs.
How deep is your emergency fund?
- Measure It: Total how much money you have in your savings accounts and other liquid pools of cash. Compare it to your usual monthly expense rate to see how long you could manage if you lost your income.
- What You Can Learn: How well-prepared you are for financial emergencies.
- Improve It: Put aside at least $1,000 in savings however you need to, even if it means holding a garage sale or taking on a side gig.
- Simplify: Set up an automatic transfer from your direct deposit payroll, feeding a small payment into your emergency savings each month.
5. Monthly Income
We’re talking total net monthly income here. That’s from your job, your partner’s job, alimony, disability, and dividend payments or rent payments — whatever kind of money comes in between the first and last days of the month, that’s your monthly income.
You want to calculate this twice. Track how much money came in this month, then track your average monthly income. When you set your budget, you don’t want to do so based on the income for a month with several windfalls. Instead, base it on the lowest-income month of the past year.
- Measure It: Look at your bank statements and tally all the deposits, then add any income that came through in cash.
- What You Can Learn: This is one of the two baseline statistics for your finances, the other being monthly expenses.
- Improve It: Brainstorm a way to add 10% to this number, whether through a raise or overtime, a side gig, or some other money-maker.
- Simplify: Online banking and some financial apps can track this amount for you automatically so you don’t have to look it up manually each month.
6. Monthly Spending
Add up all the money you spent on everything during the past month. Whatever money went out between the first and last days of the month, that’s your monthly spending.
Many people focus on their earnings, but they can get in trouble if they don’t watch their expenses. Since spending is easier to change in the short term than income, it’s crucial to observe this metric.
- Measure It: Look at your bank and credit card statements, and tally all the debits. It’s a good idea to categorize as you go.
- What You Can Learn: This is the other baseline statistic for your finances, along with monthly expenses.
- Improve It: Brainstorm ways to remove a total of 10% from this number by whatever means are necessary.
- Simplify: As with monthly income, online banking and financial apps can track and categorize this for you automatically.
7. Net Worth
What is your total monetary fortune at this moment, including liquid assets, investments, and real estate?
This number is rarely meaningful in real-time because your assets might take weeks or months to access or carry hefty penalties or losses for cashing out now. However, it gives you a general idea of your financial progress compared with your net worth from the previous year.
- Measure It: Total up your cash reserves, investment accounts, real estate holdings, and other assets. Subtract all of your debt. The resulting number is your net worth.
- What You Can Learn: A general sense of your overall financial health.
- Improve It: Paying down debt is the fastest, surest way to improve net worth.
- Simplify: This is by nature a complex process. The best way to simplify it is to make it a habit.
8. Number of Subscriptions
Subscriptions are like cancer for your finances. They fly under the radar and seem to grow with each passing month. And if left unchecked, they can be fatal for your fiscal health. We get used to the money going out each month, even for subscriptions we no longer use.
You don’t have to cancel all of your subscriptions. But doing a regular audit to catch the ones you’ve forgotten about, never use, or rarely use can free up a surprising amount of your disposable income.
- Measure It: Go through your bank and credit card statements, and identify all of your subscription payments.
- What You Can Learn: How many automatic payments you’re making each month that give you no meaningful benefit.
- Improve It: Cancel every subscription you don’t use and at least half of the subscriptions you use occasionally.
- Simplify: Designate a single credit card for all your subscriptions and memberships so you can track everything easily.
9. Number of Transactions
How many financial transactions did you make today, this week, and this month? Again, count both the transactions you made intentionally in person and those that went through automatically.
This number helps you get a handle on how often you’re spending money. Many people find that, simply by knowing they’ll track it, they cut down on small drive-through stops, soda runs, and other minor purchases that don’t significantly improve life but drain financial health.
- Measure It: Check your bank accounts, and record your number of transactions each day.
- What You Can Learn: How often you spend money, which is related to how much money you spend.
- Improve It: Commit to one day of zero transactions each week.
- Simplify: Change your money flow by using only one debit or credit card for your expenses so it’s easier to keep track of everything.
10. Retirement Progress
If you plan to retire at 65 and you need to save a certain amount of money to retire, will your current spending and savings habits make that possible? You can only know this if you track your retirement contributions and total savings toward that day.
This isn’t just important for your retirement. How much money you can put toward retiring is also a strong indicator of your overall financial health and habits since it gauges precisely how much extra money you have left over after your monthly spending.
- Measure It: Use a retirement calculator to determine how much you need to save by your planned retirement date, then compare that with your balance, current contributions, and likely interest earnings.
- What You Can Learn: Whether or not you’re on track for retirement.
- Improve It: Maximize your tax-protected retirement contributions.
- Simplify: Unless you’re exceptionally financially savvy, a financial planner can help set goals and keep you on track.
11. Savings Percentage
This number is how much of your gross monthly income goes toward savings. It tells you a lot about how much extra money you have compared with your habitual spending.
All the different savings count here: retirement, short-term emergency fund, vacation fund, college savings, and everything else. This isn’t really about how much you save each month. It’s about how much money you have left over and whether you save at the beginning or end of the month.
If you have a lot of credit card debt, calculate the amount you pay on those cards instead. Paying down credit card debt is a more intelligent short-term financial goal and measures the same habits and health.
- Measure It: Divide the amount of money you save in a month by your gross earnings. The result is your savings percentage.
- What You Can Learn: Some specific motivations and indicators for improving your financial habits.
- Improve It: Save a little money on payday, rather than waiting for the end of the month, to protect what’s left over.
- Simplify: Set up an automatic contribution to savings as part of your direct deposit from work.
12. Wealth Score
If you quit working today, how long could you keep going before you had to earn money again? That number of months is your wealth score. You could also view this as another way to gauge your progress toward retirement since you can retire when this score reflects a longer timeline than your likely life expectancy.
Wealth score is suitable as a number but also a strong motivator. Freedom from the obligation to work is one of the best personal freedoms we can earn, and your wealth score tells you exactly how much of that freedom you have.
- Measure It: Find your net worth and adjust it for any penalties you might pay for cashing out today. Divide it by your average monthly spending.
- What You Can Learn: How close you are to financial freedom.
- Improve It: Make progress on all of your other vital signs, each of which contributes to your wealth score in a different way.
- Simplify: This is another one that’s too complex to simplify. Instead, make checking it a habit so the steps become easy.
Final Thought: Time to Go on a Diet
If your doctor finds trouble with your physical vital signs, chances are they’ll suggest a healthier diet and more exercise. Again, this is equally true with your crucial financial signs. After you test your financial health, the next step is to make those lifestyle changes that will lead to a better money situation in six months, a year, and for the rest of your life.
We’re not saying it will be easy or even enjoyable at first. We are saying it can make a life-changing difference in your finances — but only if you start soon and stick to it over the long run.