Personal Finance

4 Signs That Your Finances Are in Good Shape

A couple looking worried about money, with a laptop and bills.

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What is your financial score?


Key points

  • Poor financial health is directly linked to high stress and anxiety.
  • Answering these four money signs can help determine if your finances are in good shape.
  • Your emergency and retirement savings, your debt-to-income ratio, and your credit score are keys to determining your financial health.

Tracking our health is much easier with today’s technology. There are apps and devices that can measure your fitness level and track how many calories you have consumed and burned. But what about tracking your finances?

Unfortunately, 73% of Americans say their finances are the top stressor in their lives and 65% say they don’t know how much they spent last month. Lack of financial literacy is linked to high levels of stress and anxiety. Here are four money signs that make up your financial health. Score yourself and track how financially fit you are!

1. Emergency savings

Almost 6 out of 10 Americans can’t cover an unexpected $1,000 bill. This means if an unexpected expense comes up, many of us have to borrow in order to cover it. How well are you prepared?

  1. 10 points: six months or more of your household expenses saved
  2. 9 points: three to five months saved
  3. 8 points: one to three months saved
  4. 7 points: less than one month

Goal: Having an ample emergency fund is an important part of your financial health. How much you should have in your emergency fund depends on factors such as your current income and your recurring expenses. Most experts recommend setting aside three to six months’ worth of expenses. If you are a freelancer or gig worker, you might want to set aside even more.

2. Retirement savings

About half of Americans (49%) are not financially ready to retire and have no retirement savings. You want to save and invest enough to give yourself enough income without having to work. Are you saving enough? First, determine how much money you will need in retirement. You can then use a retirement calculator to help you determine how much you need to save to meet your retirement goals. How does the number compare to what you are currently contributing to savings?

  1. 10 points: Saving 100% of your annual contribution goal
  2. 9 points: Saving at least 90%
  3. 8 points: Saving at least 80%
  4. 7 points: Saving less than 70%

Goal: Compound interest will help you grow your savings. The best time to invest may have been in the past, but the second best time to invest is now. Even if it is a small amount, take advantage of an IRA, 401(k), etc. A small amount can go a long way. If you are in your 30s, try to save 10% of your income and if you’re in your 40s or 50s, aim to save 15%.

3. Debt-to-income ratio

This number shows how well you manage your debt. A whopping 60% of risk managers named high debt-to-income (DTI) ratios as their top concern in approving a loan. You can calculate your ratio by adding up your minimum monthly debt payments and dividing it by your gross monthly income. For example, if the sum of your loans (mortgage, car, etc.) and your minimum monthly credit card payments is $2,000, and your monthly salary is $4,000, then your DTI ratio is 50%. This means half your income is going to paying down debt and this is while only making minimum payments on your credit card! What is your DTI ratio?

  1. 10 points: DTI of 25% or less
  2. 9 points: DTI of 26% to 36%
  3. 8 points: DTI of 37% to 43%
  4. 7 points: More than 43% (in most cases, this is the highest to qualify for a mortgage with favorable terms)

Goal: Your DTI plays a large role in your credit score as well. Pay down your debt and boost your income. Both will decrease your DTI. There are several debt repayment strategies that you can use, such as debt snowball or debt avalanche. Avoid taking on more debt and look for a side gig to increase your income if possible.

4. Credit score

Your credit score is one of the most important financial numbers. Your score determines the interest rate on your loans and credit cards. The difference between a low and high score can be hundreds of thousands of dollars in interest paid from your loans over your lifetime! Your credit score ranges from 300 to 850. What is your score?

  1. 10 points: Score of 750 or higher
  2. 9 points: Score between 720 and 749
  3. 8 points: Score between 620 and 719
  4. 7 points: Score less than 620

Goal: Your payment history makes up 35% of your score, your debt-to-income ratio 30%, your credit history 15%, your credit mix 10%, and new credit inquiries 10%. To increase your score, make sure you pay all your bills on time, catch up on past due accounts, ask for a credit limit increase, and regularly check your credit report for any errors. Experian offers a new service where you can get credit for paying your phone, utilities, and bills such as Netflix.

Your final result

Add up your total score and divide it by 4. If your score is 9 or more, congratulations, you are in excellent financial health! Make sure you continue to work to stay there!

If your score is between 8 and 9, there is room for improvement, but you have made good progress so keep it up. If your score is below 8, it is important to prioritize improving your financial health. The steps above can help. Continue to improve your finances until you are able to get a 10.

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