Show Me The Money: How Financially Fit Are You?

| Money

money tree

In today's world, it's becoming easier and easier to track your physical health. We've got digital scales, fitness trackers, nutrition tracking apps to help us make sure we're doing our part to stay healthy. With all the thought (and money) sunken into your fitness, how often do you track your financial fitness? Below, LearnVest shows you how to nail down the four key money vital signs that make up your total financial health picture.

>> Read more: Money Talks: Tips to Make the Most of Your Money Conversation

LearnVest shows you how to run those numbers, and even offers up a points scale for each money vital sign, to help you assess whether you’re in the healthy zone — or if you might need to get on a financial fitness regimen, stat!

Financial Fitness Vital Sign #1: Emergency Fund

Remember when you were blindsided by an overheated car engine and a trip to the ER — within a week of each other? Not only did the emotional stress likely catch you off guard, but the financial stress probably sent your budget into a tailspin too.

“When families or individuals who don’t [have an emergency fund] face an unexpected expense, they may have to borrow to cover the tab,” says Dennis Prout, a CFP® and founder of Prout Financial Design in Traverse City, Mich. “That can lead to a cycle of debt and financial insecurity—and make it difficult to save for the future.”

Are you in the healthy zone? Unfortunately, 34 percent of Americans have no emergency savings, according to a 2015 survey by NeighborWorks America — essentially leaving a third of the country’s finances vulnerable to emergencies.

So how well prepared are you for a rainy day? Give yourself …

  • 100 points if you have at least 6 months of take-home pay saved, based on the highest earner in your household
  • 90 points if you have 3 to 5 months
  • 80 points if you have 1 to 3 months
  • 70 points if you have less than a month

money in jar

In general, the more inconsistent your income and the more dependents you have, the larger an emergency-fund cushion you should have, suggests Matt Shapiro, a CFP® with LearnVest Planning Services. If you’re self-employed, for example, you might want to shoot for nine months of take-home pay.

Bottom line: People should have a minimum of one month’s worth of take-home pay in an emergency fund before they work toward any other financial goal, and eventually aim for somewhere between three and nine months.

How to get healthier: Prout suggests looking for “money leaks”—areas of your budget where you inadvertently spend more than you need—in order to free up emergency fund money. Do you pay for a subscription you barely use? Eat out one more day a week than you should? Those cost savings can be transferred to a high-interest savings account.

“Knowing how much to save is the easy part—actually making it happen is the hard part,” says Shane Sullivan, a CFP® and partner at Valhaven Wealth in Austin, Tex. “What my wife and I do is automatically transfer money from our main account to an emergency fund every week.”

This move helps make saving a given—and a no-brainer.

money bills

Financial Fitness Vital Sign #2: Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is a figure lenders use to gauge how well you manage your debt—and it’s math worth doing because it can affect your future financing. To pin down your DTI, add up your minimum monthly debt payments and then divide the sum by your gross monthly income. For example, if you pay $1,300 for your mortgage, $500 for your car, and owe a minimum of $200 on your credit card, then your monthly debt totals $2,000. If your gross monthly income is $4,200, your DTI is roughly 48%.

“In this case, nearly half of your income is ‘spoken for’ by outstanding debt,” Prout says. “I’ve seen people have to delay purchasing new homes or cars because their debt won’t allow it.”

Are you in the healthy zone? As you may have deduced, the lower the DTI, the better — it’s an all-too-important consideration for lenders these days. According to a 2014 FICO survey, 60 percent of credit-risk managers named high DTIs as their top reason for concern over whether to approve a loan. So give yourself …

  • 100 points if you have a DTI of 25% or less
  • 90 points for 26%–36%
  • 80 points for 37%–43%
  • 70 points for more than 43%

ball of money

>> Read more: 4 Ways to Overcome Credit Card Debt

Although there aren’t hard or fast rules for what counts as the “best” DTI, Prout advises clients to work on maintaining 25% or less. And a percentage higher than 36%, adds Shapiro, could mean having a hard time getting approved for a mortgage. Meanwhile, the Consumer Financial Protection Bureau notes that, in most cases, 43 percent is the highest DTI a borrower can have and still qualify for mortgages with favorable loan features.

How to get healthier: It’s straightforward: Lower your debt or boost your income. That said, reducing your debt is likely what you can tackle most immediately, so start by taking inventory of your debt in order of interest rate. Then consider paying off your high-interest credit cards and personal loans first, before embarking on a more aggressive plan to pay off lower-interest car loans and student loans, says Shapiro.

“Along the way you should also make an agreement with yourself and your spouse not to spend beyond certain limits,” suggests Prout. “For instance, maybe your rule is to wait 72 hours before making any purchase over $100.”

Want to see steps three and four? Click here to see the original article from LearnVest!