How do you know if your finances are on track? Does it feel like you’re treading water each month, or do you have plenty left over after the bills are paid to spend as you wish?
Fortunately, there are some measures you can use that might give you a clearer idea of how your finances are faring — and how far you have to go to reach your goals. We’ve compiled just a few of these below.
Your net worth
This is one of the more straightforward ways to get a read on your financial health. You can calculate your net worth by adding the value of all the assets you own (such as savings, investments and property) and then subtracting any debts (such as your mortgage, credit card debt and student loans).
If you have a mortgage, don’t be discouraged if your net worth is negative. Mortgage debt is widely considered to be ‘good debt’ thanks to its potential to generate future value, either through capital appreciation or rental income.
While your net worth might fluctuate every now and then as a result of big-ticket purchases or fluctuations in the share market, it should ideally be trending up over time. Knowing this number might give you an idea of how much debt you can afford to take on, what you can afford to spend, and when you might be able to retire.
Your debt-to-income ratio
Another vital sign worth monitoring is your debt-to-income (DTI) ratio, which essentially spells out how much available income is going towards servicing your debts. You can calculate yours by dividing your total monthly debt payments by your gross monthly income. The higher it is, the greater your debt burden.
You’ll likely hear this measure come up in talks with mortgage lenders. As part of their efforts to gauge borrowers’ creditworthiness, banks and lenders will look at DTI ratios (among several other factors). If they decide that yours is too high, it could signal risk and ultimately affect your ability to get your application over the line.
Your current rate of savings
Keeping tabs on how much you save each month as a percentage of how much money you earn can help you understand whether you’re spending money responsibly or living beyond your means.
A common rule of thumb suggests saving 20% of your income, but for many people this might not be helpful. For example, high income earners and those who have their hearts set on retiring early might be in a position to save much more. Meanwhile, those whose budgets are already stretched thin might have to settle for a more modest target.
If you’re struggling to meet your savings goals, there are a few things you can do that might bring them within reach. Think about setting up automatic transfers to your savings account, and scan your bank statements for insights into what you’re spending money on and what you can afford to cut out.
How many months’ worth of emergency funds you have
Job loss and medical scares can occur at any time, and it pays to have money set aside to help cushion the blow if misfortune were to strike. A good rule of thumb is to have enough in your emergency fund to cover three to six months’ worth of living expenses, but you might aim to have more — just for extra peace of mind.
As an aside, it’s often a good idea to keep your emergency fund in a separate account to your savings, ideally one that also has a high interest rate. This can help reinforce the idea that it’s only for emergencies and discourage you from dipping into it unless you really need to.
Your superannuation balance
When it comes to saving for retirement, super is likely to be your most obvious measure of financial health. But this number alone won’t mean much unless you take into account your age and what type of lifestyle you want in retirement. If you’re still at the start of your career, a lower super balance is to be expected, and any dips due to market performance may not be as concerning compared to someone older whose account has less time to recover.
If you’re well into your career and feel that your super balance isn’t where it should be, there are some things you can do to get it looking healthier. For example, you might enter a salary sacrificing arrangement with your employer, or make extra contributions from your take-home pay (which you might be able to claim as a tax deduction by submitting a Notice of Intent form to your super fund).
