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Financial Health Similar to Physical Health

Financial health, like physical health, requires regular examinations. Here are five questions to ask yourself annually, in order to diagnose problem areas early and keep tabs on your overall well-being:

Is your net worth increasing?

Answering this question will give you one vital baseline from which to evaluate the past year's financial changes. You simply subtract everything you owe (all your liabilities) from everything you own (all your assets). If you're paying down your debts, your net worth will have increased even if you haven't added any assets.

A downward turn in net worth is not always negative, but it's important to evaluate the reasons for it: Sometimes external factors cause losses beyond your control, as when investments lose value due to declines in the market. If you've taken on debt in order to start a business or get more education, it may be a wise choice, but sacrificing net worth for lifestyle purchases is likely to lead to trouble.

How healthy are your ratios?

The relationship between debt and income is the next number you should take a look at. Financial advisors usually suggest that younger people dedicate no more than 30% of their total income to paying debts, and this percentage should gradually decrease until it reaches zero at the point of retirement.

Savings rates are also important to keep track of: a good target to aim for is saving at least 15% of your income for retirement, and older workers approaching retirement should try for a percentage closer to 20 or 25%.

Are you earning more than you spend?

This sounds like a very simple question, but many people are juggling so many accounts that they don't stop to evaluate the relationship between income and expenses. Online services like or can help you get an overview of your actual monthly bottom line.

How's your insurance level?

Check the deductibles on your auto insurance and your homeowner's or renter's policies. Depending on your risk levels, you may want to save money on premiums by choosing a higher deductible. Also, if you're older, you should reevaluate your disability and life insurance coverage. Disability insurance gets expensive for people in their sixties, and most policies stop paying at around the age of 65 anyway. Likewise, older people may want to drop some life insurance coverage in favor of a long-term care policy.

What's new in your life?

Have you gotten married, had a child, or become eligible for Social Security? Major life events usually bring the need for a new financial planning strategy, as well as a number of specific tasks. You may want to start a new savings account, revise your retirement investment strategy, or update your estate planning.


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