The beginning of a new year is a great time to evaluate your family's financial health. The results might seem discouraging during an economic downturn, but knowing where you stand now can help you take steps to improve your family's financial future. Checking your cholesterol and blood-sugar levels gives you important information about your physical health. In the same way, your net worth, debt-to-income ratio, and credit report provide important information about your financial health.
As intimidating as the term may seem, your net worth is simply what you own (your assets) minus what you owe (your liabilities). A net worth statement gives you a snapshot of your financial status at a particular point in time. Click here for a form that will help you calculate your net worth. Although net worth can be positive or negative, the true value of knowing your net worth is in comparing it from year to year. For example, if your net worth on Jan. 1, 2009 was negative $5,000 and your net worth on Jan. 1, 2010 is positive $2,000, congratulations are in order. You have improved your net worth by $7,000 during the year! Try not to let the initial number discourage you. The ability to measure your financial progress in the coming year is what really counts.
Another important calculation is your debt-to-income ratio. This percentage can tell you whether or not you are keeping your debt to a manageable level. First, add up all of your required monthly consumer debt payments (everything except your mortgage payment). Divide that number by your monthly net (after tax) income. Then, multiply the result by 100. For example, if your monthly consumer debt payments equal $300 and your net income is $2,000 per month, the calculation would be 300/2000 = .15 x 100 = 15%. If your ratio is 15% or less, congratulate yourself for keeping your debt under control. A ratio of 20% or higher is a red flag - an indication that one of your goals for the coming year should be to pay down debt.
Finally, if you have not checked your credit report in the last 12 months, now is the time to tackle this important task.
Click here for a copy of the Annual Credit Report Request Form, which will show you how to check your report by mail, by phone, or online. Everyone is entitled to one copy of their report from each of the three credit bureaus every 12 months. Checking your report will allow you to correct errors, find out if anyone is misusing your accounts, and show you things you can do differently in the future to improve your credit report.
I hope you will take the time to conduct this "financial check-up" to help you plan for improving your financial health in the coming year. If you want to go further, financial experts recommend the following:
- Update beneficiary information on all accounts and policies
- Review your insurance coverage
- Adjust tax withholding and maximize deductions
- Evaluate your retirement savings
- Update your will and estate plans.
If you would like some personalized suggestions to improve your financial health, take the financial fitness quiz at http://njaes.rutgers.edu/money/ffquiz/.