Metrics That Help Gauge Financial Health
Debt-to-income ratio, savings balances and credit scores shape borrowing power, loan terms and readiness to buy a home in today’s market.
NEW YORK — Effective money management can help men and women achieve their short- and long-term goals. Wise investment strategies and a commitment to saving for retirement are great ways to manage money over the long haul, but it's important to seek ways to do so in the short-term as well.
Monitoring financial health is a short-term strategy that can keep individuals on a path toward long-term security. While various metrics can be considered as indicators of financial health, adults can keep these three variables in mind as they look to utilize short-term strategies to ensure their long-term success.
1. Debt-to-income ratio: Debt-to-income ratio can be a good indicator of financial health. The Consumer Financial Protection Bureau defines debt-to-income ratio (DTI) as all your monthly debt payments divided by your monthly gross income. Lenders utilize DTI to determine the creditworthiness of loan applicants, but individuals also can use it as a metric to gauge their financial health. Monthly debt payments include mortgages, auto loans, student loans, and other debt payments, including credit cards. Individuals whose debt payments total $2,000 per month and who earn a gross monthly income of $6,000 have a 33% DTI. The credit experts at Experian suggest a DTI of 35% or less is indicative that debt is being handled well, so that's a figure to keep in mind.
2. Savings balances: Savings accounts don't generate as much interest as they did throughout the 1980s and 1990s. According to Nasdaq, savings interest rates climbed as high as 8% in the 1980s but have fallen below 0.25% since the financial crisis of 2008. That's led some to devalue savings, but savings balances can be a good indicator of financial health. A substantial savings account can help individuals avoid taking on debt when costly emergencies and expenses arise unexpectedly, thus helping them keep their DTI in a financially advantageous range.
3. Credit score: Credit score is another strong and easily accessible indicator of personal financial health. Individuals can now access their credit scores for free each month through their banks and credit card providers. Experian notes that credit scores range from 300 to 850, and where a score falls in that range can indicate if a person is managing credit in a healthy or unhealthy way. Experian reports scores 740 and above are very good, while scores between 670 and 739 are considered good. Scores between 300 and 579 are considered poor, while a score between 580 and 669 is considered fair. Scores below 669 indicate there's room to use credit more wisely, which involve reducing reliance on consumer credit, making payments on time and ensuring payments are more than the monthly minimum.
These three metrics and others can be utilized by individuals looking to gauge their financial health in an effort to realize their short- and long-term goals.
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