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5 ways to measure your financial health

Many Americans do not have an accurate understanding of their finances. For example, research from Mint shows that three out of five Americans didn’t know the amount of money they spent the previous month.

An accurate perception of your finances means you know not only how much you spent last week or last month, but you also know how much you owe and to whom, as well as how much money you have in the bank or in investments. Financial Literacy Month is an ideal time to take stock of your financial situation. Consider these five ways to measure your level of financial health.

Do you have a budget?

If you don’t have a budget, or a simple plan for spending your money, you may frequently run out of money before the next payday. You may also neglect to save for financial goals beyond the current month’s bills.

On the other hand, creating a budget—and sticking to it—could help you to have enough money for the things you need and the things that are important to you. You can build a simple budget using a free budgeting app, a spreadsheet, or just by making a list on paper.

Be sure to include all your expected expenses, even infrequent ones like annual insurance premiums, as well as a line item for savings.

Do you have an emergency fund?

Almost 60 percent of Americans don’t have enough savings to cover a $1,000 unexpected expense such as a car repair, home appliance repair or emergency room visit, according to research from Bankrate. And these unexpected expenses are common: Almost one-third of respondents said they or a family member had faced an unexpected expense during the past year, even before the pandemic hit.

Building an emergency fund can help you avoid taking on debt to manage the unexpected—and the unexpected is inevitable. Most experts recommend saving three to six months of expenses in an emergency fund. Amassing that much in savings may sound daunting, so focus on saving at least $500 or $1,000. Once you’ve reached that goal, just keep building.

Are you saving for retirement?

The earlier you start saving for retirement, the less you have to save because compounding interest will allow your savings to grow exponentially. That means the interest on your initial investment will start earning interest, and that interest will start earning interest, and so on.

If your employer offers a retirement plan such as a 403(b), make it your goal to participate. Tax-advantaged retirement accounts such as 403(b) plans and IRAs allow you to save money on taxes while preparing for your financial future. Some employers also offer contributions to match employees’ retirement contributions, so if that’s an option, aim to contribute enough to take advantage of the full match.

Changes to the Social Security system are likely in the future, as the population ages and political winds change. For that reason, it may be important for people in younger generations to save more for retirement.

Are you paying down debt?

Secured debt, such as a home mortgage or a car loan, usually has lower interest rates and each payment covers both interest and principal, helping to reduce the total amount of debt on a monthly basis. However, unsecured debts such as credit cards or personal loans often involve high interest rates and can take many years to pay off if you only make the minimum payment each month.

It’s best to use a credit card only for expenses you can pay off completely each month. Maintaining a balance on your credit card or other personal debt results in paying high interest rates and prevents you from meeting financial goals.

Start paying down debt by focusing on the smallest debt or the highest interest debt first, making minimum payments on all other debts and paying as much as possible toward the target debt. When you’ve paid off that one, move to the next.

Do you have a plan for retirement income?

Saving blindly for retirement is a good first step, but you should also have a plan for how you’ll use that investment income in retirement. For most people, that plan might include a combination of earned income, Social Security payments and investments.

It’s a good idea to talk with a financial professional you trust about your needs and wants for retirement. They can help you build out a retirement income plan that will work for your particular situation.