How to Self-Diagnose Your Financial Health

The New York Times Your Money section features consistently great advice from Ron Lieber and his team. (This team includes Carl Richards, who you may remember from his excellent blog Behavior Gap; Richards has contributed a couple of articles here at GRS in the past.)

Last week, Your Money featured an article from Tara Siegel Bernard in which the author explained how to self-diagnose your financial health. “We asked planners what they ask their clients during their annual financial physicals,” Bernard writes. “Their questions can help you diagnose your financial situation.”

Here are the eight questions she recommends you ask yourself during your financial check-up:

Is your net worth growing?

Your net worth is the total of your assets minus your liabilities. (So, if you have $200,000 worth of stuff but owe $220,000, your net worth is -$20,000.) I don’t see much value in knowing my net worth, and I don’t track it, which seems like heresy to some people. Many folks use net worth the primary tool to track their progress, and the New York Times article argues that it’s one of the best gauges for measuring financial health.

How are your financial ratios?

According to the article, you can also track your financial health by looking at your debt-to-income ratio, your personal savings rate, and the size of your emergency fund. The article offers some guidelines for people at different stages of life. My recommendations? Keep your total monthly debt payments — including mortgage — below 33% of your gross (pre-tax income), and below 25% if possible; save as much as possible, but aim for 10% or 15% or more (my wife saves over 25% of her income); and aim to have enough money set aside to cover 3-6 months of expenses.

Are you spending more than you earn?

This question gets to the crux of personal finance. If you spend more than you earn, your cash flow is negative and you’re losing ground. But if you can outearn your spending, you’ll actually build wealth. The New York Times recommends that you track your spending to be certain you’re not outpacing your income.

What changed in your life during the past year?

Life is fluid. People get married, have children, move, change jobs, get divorced, and, yes, die. All of these events can affect your financial situation. Plus, your own personal goals may change, leading to a shift in priorities. While it’s important to have fixed financial goals, it’s also important that you make periodic course corrections.

Are you still adequately insured?

We don’t talk a lot about insurance around here (I don’t know much about it, and when I bring in outside experts, you folks get cranky!), but it’s still an important subject. Insurance is a vital part of your financial arsenal — it’s there to protect against catastrophes. But as your life changes, your insurance needs change. Be sure to conduct periodic reviews.

Do you need to make changes to your estate plan?

Just as your insurance needs change with time, so do your needs for estate planning. As you accumulate wealth and build a family, things can become complex. The New York Times suggests reviewing your will (or other documents) at least once every five years.

Does your investment portfolio require maintenance?

The stock market has been going gangbusters for over a year now (although you might not guess that from the continued hysterical headlines in some corners), but that doesn’t mean you should be pumping all your money into it. Instead, it’s important to remember the lessons from the crash. If the wild swings in your portfolio caused you stress and worry, you may need to reconsider your asset allocation by moving funds to high yield savings accounts or other investments.

Have your goals or outlook changed?

Are you happy? “At its core, financial planning is not simply about money,” Bernard writes. “It is about finding the best way to finance what you want out of life.” This echoes a couple of elements of my core financial philosophy, and I think it’s the key to maintaining financial health.

To read professional advice on how you should approach each of these questions, read the article from The New York Times.

While you’re at it, check out their 31 steps to a financial tuneup, which is a customizable checklist of tasks that you can use to boost your financial health. (This tuneup reminds me of my own suggestion that you take a Money Day, a self-imposed personal finance workday, once a year.)

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There are 38 comments to "How to Self-Diagnose Your Financial Health".

  1. mbelousov says 29 March 2010 at 13:23

    I also do not worry about net worth. Most people don’t realize the fact that some of their net worth is in fact worthless.

    For instance, I wouldn’t consider your own house an asset unless it’s paid off. Lose your job and diminish your cash flow to find how if your own house is a liability or an asset. If it gobbles up money every month, it’s a liability, regardless if your banker puts it in your asset column. Same with cars, not really an asset in most cases.

    To me assets are things that can pay for itself and put extra money in my pocket, in my case rental property, business, etc. As long as I keep my rentals occupied, I can lose my job and still be completely fine considering they more than pay for themselves, including professional management, which leaves me to deposit a check every month and relax.

    Once you acquire an true asset, you can use them to buy liabilities. For example I can use my cash flow from my properties to finance a car and have my assets pay my liability. At the end of the terms, I have a paid for car, I’ve kept the assets, hopefully they increased in value, and my cash flow went up due to rent increases.

    Of course I wont be buying any liabilities anytime soon, I don’t like bad debts. I would rather save up that cash flow and buy more cash flowing assets, and drive my beater car.

    There is my 2 cents, anyone else have that line of thought?

  2. Nicole says 29 March 2010 at 13:36

    Hey– it’s only cranky when the outside expert is trying to sell a product. I totally love independent expert posts on insurance.

  3. Ginger says 29 March 2010 at 14:16

    I would not mind an outside expert either. Mbelousov seems to be confusing income producing asset with asset. I can make money by selling my house but then I would need a place to live, similarly I could sell my car but I would have problems getting around. However if push comes to shove these assets can bring me in money, they are just used as asset only as a last resort, otherwise we use them as transportation or a place to live.

  4. ldk says 29 March 2010 at 14:30

    If you are regularly spending less than you earn then your net worth should be growing…period. Maybe your liabilities are decreasing; maybe your assets are increasing–whatever. If it’s not…that’s a pretty good sign that something is out of whack–and finding things that need work is the point of a check-up. It’s really not that complicated.

    And if you don’t want to include your principal residence, then don’t–just be consistent over time. (Though having a huge liability by way of your mortgage with no correlating asset doesn’t make much sense to me, but to each their own.)

  5. EscapeVelocity says 29 March 2010 at 14:35

    Are they talking percentage of current income going toward current payments on debt, or total? If the former, that sounds reasonable. I recall reading somewhere that at age 45, one’s total debts shouldn’t exceed one’s annual gross income (and then of course it’s supposed to go down from there).

  6. Damon says 29 March 2010 at 14:56

    They left out a couple important ratio’s

    Net worth is important, but more as an input to your solvency ratio which lets you know how much your assets can drop in value and you’ll still be solvent. In other words, if the market tanks again and your home drops in value even more, can you walk away without owing even more.

    Liquidity ratio can be easily manipulated to show you how long your emergency funds will last.

  7. Chris Johnson says 29 March 2010 at 15:01

    Net worth is still a valid indicator, in that you need to track it to know how close you are to your retirement goals and whether you’re on track. I like, which I believe I learned about through GRS.

    I agree that the residence should not be part of that calculation in that it won’t produce income for retirement, but the other net worth numbers should be growing.

    And the estate planning review is a welcome tip–my reviews of clients’ plans on a regular basis usually results in some kind of savings to them, whether it’s through lower taxes or lower costs by funding new assets to the trust. It’s especially worth it this year, as the uncertainty of the estate tax/capital gains tax means some estate plans will result in some unnecessary taxes for some people and some unintentional unequal treatment of beneficiaries.

  8. Jacque says 29 March 2010 at 15:03

    The really depressing part about debt is that it is constantly eating away at your net worth as interest accrues against you. And even when you are making payments, it is only adjusting the numbers. For example, making a hypothetical payment on a student loan:

    Net Worth = Assets – Liabilities
    $10,000 = $20,000 – $10,000
    -$,1000 +$1,000 payment
    $10,000 = $19,000 – $9,000

    Net worth still has not improved.

    But in the future months the liability column won’t grow at as fast of a rate because there is less interest accruing on the principle. So you are in a better position financially today *but* your net worth wouldn’t reflect that.

  9. Kate says 29 March 2010 at 15:04

    Great information. I am trying to build up some liquid net worth so I always have cash available. I think it is a good plan not to consider your house an asset unless it is paid off, I feel the same way about a car. The only difference is if you own rental properties that actually make money on the mortgage.

  10. Jake @ CareerAde says 29 March 2010 at 15:14

    I do track networth, I think it is a useful thing to do.

    I also track a set of other metrics that help me gauge my financial health:

    Non-housing networth (excludes house value and mortgage)
    Cash savings rate of net income
    Total savings rate (includes debt pay-off and retirement accounts) of gross income
    IRR on investment accounts
    Cash balance in months of current living expenses
    Investment income as % of living expenses
    % of networth in cash vs. market vs. real estate etc.

    @ #1: You must be one of the people who listen to Kiyosaki. He confuses technical terms with his own financial baby-talk mumbo-jumbo. I don’t feel like arguing the point, to much like fighting windmills. If you need to use the wrong terminology to understand a common sense concept, knock yourself out.

  11. jackie says 29 March 2010 at 15:28

    @#4 “If you are regularly spending less than you earn then your net worth should be growing…period.”

    Not true. If you own a home, especially in today’s markets, the changing value of the home with no corresponding change to mortgage can easily overshadow spending more or less than you earn.

  12. bethh says 29 March 2010 at 15:30

    I don’t have a house or mortgage, and I exclude retirement savings when I roughly calculate my net worth. I use it as a snapshot of my general state, more than anything else. Right now I’m at a stage in my journey where the jumps are exciting!

    approximately 1993-2007: negative net worth (varying a lot, never more than 25k; I think I even had a few years in the black before I went back to school.)
    2008: positive net worth…barely!
    2009: 4-figure net worth
    2010: anticipate a 5-figure net worth (even if it’s 10,001 I’ll be happy!)

    Since I’m not counting retirement savings, going from a 5-figure to a 6-figure net worth may never happen, so I suspect I won’t track the figure too closely after this year.

    The numbers look so amazing but there is no special story: save money and pay down debt. Lather, rinse, and repeat.

    Even if I don’t calculate it in the future, I think it’s important that I’m always able to quickly and easily access the information to perform the calculation.

  13. mbelousov says 29 March 2010 at 15:41

    I assure you I am not confused, it is mearly my point of view. I am just curious what others think, and wont knock them for their own views.

  14. chacha1 says 29 March 2010 at 16:14

    Interesting that the points on net worth and financial ratios are getting most of the comments so far. IMO all the other points are of far more value to the average person in diagnosing financial health.

    I could pay many hundreds more per month on getting rid of debt, thus improving my debt to income ratio and net worth, if I dropped all my insurance; but that wouldn’t be a sane (healthy) thing to do.

  15. sam @ moneypenny says 29 March 2010 at 18:08

    Neat post – I enjoyed your summary! 🙂

    I agree with you on net worth for the most part – I don’t tend to track net worth beyond ensuring that it stays positive. In a way, this mentality composes part of my emergency fund – knowing that my asset base could in fact cover all debt (admittedly, I don’t have any consumer debt, so it’s really investment debt I’m thinking of).

  16. Storch Money says 29 March 2010 at 18:22

    Jackie #11

    Completely true. Since about 2004 I have watched $100,000 or so just vanish with declining property values. Spending more than you earn is no guaranty of increased net worth.

  17. DarkRydz says 29 March 2010 at 18:36

    I’m kind of in the “Net worth is worthless” camp. An asset is only worth what it’s worth if there is someone with cash in hand willing to buy it. case in point – I have a very nice sailboat I’ve been trying to sell for months. When push comes to shove – I may need the extra money, but to the best of my knowledge, no one takes boats as a form of payment. If you know of anyone who does – let me know!!

  18. chunkymonkey says 29 March 2010 at 18:50

    “My recommendations? Keep your total debt – including mortgage – below 33% of your gross (pre-tax income), and below 25% if possible; ”

    How can your total debt be 33% of your annual income?? If your gross income is 100K a year, that means your debt including mortgage should not exceed 33k, which is impossible for a great majority (unless you live in a hovel). Maybe you meant income over several years or a decade?

  19. Jake @ CareerAde says 29 March 2010 at 18:52

    # 16: I’m in the market for a boat. What are we talking about?

  20. Courtney says 29 March 2010 at 19:16

    @11 and 15, re:4 – definitely true about net worth not necessarily going up even if you’re doing all the right things…at least in the short term. From mid 2008 to mid 2009, we lost 50% of our “net worth.” I use quotes because it was in our house equity and our retirement savings (90% stocks) – both longer term assets. We continued to save, invest, and pay off our mortgage every month, but it wasn’t fun watching that number drop every time I calculated it. However, our retirement savings have since recovered (between our continued savings and the market recovery, our balances are well above our pre-crash levels). We’re still waiting for the housing market to recover though.

    Point being, that saving is the only thing you control. There are other factors that can decrease your net worth in the short term regardless of what you do.

  21. Laura says 29 March 2010 at 19:16

    I do track my networth. It makes me look at how far we’ve come from where we started. sure, I can’t really live off of it but since we don’t have any debt except for a mortgage, it’s got to be kind of good to see it going up.

  22. mbelousov says 29 March 2010 at 19:17

    @16 – reminds me of that saying “the happiest two days of owning a boat is the day you buy it and the day you sell it”…

  23. J.D. says 29 March 2010 at 20:18

    @chunkymonkey (#18)
    Oops. That should be “debt payments”, not total debt. My mistake. I’ll fix it!

  24. Eivind Kjørstad says 29 March 2010 at 22:20

    You’re failing the consistency-check. “save as much as possible” is BAD advice. Remember what was posted on this very blog a few days ago. The goal is not to collect the biggest pile of money for your heirs (if any!). The goal is to lead a free and happy life, free from worries over money, and with enough of it to be able to do what you want to do.

    Remember, money is a tool, not a goal in itself.

    There is -definitely- such a thing as saving too much.

  25. Guy G. says 29 March 2010 at 22:24


    Thanks for reminding about goals and outlook changing. They have changed, and I don’t think I’ve adjusted the other strategies I’ll need to implement to reach them like using additional tips on budgeting, performing a maintenance on my portfolio as well as reviewing my insurance needs.

    Thanks for the reminder

  26. Smarter Spend says 30 March 2010 at 02:34

    The financial ratio is the best way of judging your health, unless your in a risky business, where things can turn your way at any given point.

  27. Eivind Kjørstad says 30 March 2010 at 02:56

    The financial ratio is good, but tells only part of the story. It tells you about the situation -now- but not about the stability of your overall situation.

    If you look only at the ratio, you’ll think a person saving 10%, but with zero savings, are more financially stable than one who is overspending by 2%, but with $10 million in the bank. Which just isn’t true. (but might be after a while if both keep it up)

  28. basicmoneytips says 30 March 2010 at 03:55

    I had previously read this article too. I think he hits some pretty common sense points with money and finances.

    One thing I think people do need to watch is their debt to equity ratio. Just because you are making your payments okay and have some savings does not necessarily mean you are doing well. It only means you can carry a lot of debt, so watch that.

  29. Kevin says 30 March 2010 at 05:38


    What you describe is only true for “negative amortization” loans. On regular amortization loans, every payment is comprised of a principal component and an interest component. However, no new interest is added to the loan balance. The remaining balance is entirely principal. No interest compounding occurs. Every payment reduces the outstanding loan balance, improving your overall net worth.

    Interest does not compound on mortgages, student loans, or car loans. Basically any loan where your payment is reducing the outstanding balance. Your payments include an interest component, but your principal never has interest added to it (thus, no compounding occurs).

  30. Eivind Kjørstad says 30 March 2010 at 06:19

    @Jacque: Why should your net-worth change just because you move money from one account to another ? I don’t get your point at all.

    And yes, it still pays to do it if the interest is higher on the loan (it typically is)

  31. Courtney says 30 March 2010 at 07:40

    @Jacque – I think the flaw in your reasoning is that you assume one is using money from savings to pay down debt. If you do that, then yes, your net worth doesn’t change. But presumably most people are using their *income*, not their savings. Using your example, if you have $20K in assets and $10K in liabilities ($10K total net worth) and you have $1000 after your living expenses are met this month, then you can save that $1000 or pay down your loan by $1000. This gives you either $21K in assets and $10K in liabilities, or $20K in assets and $9K in liabilities – either choice increases your net worth to $11K. Hence the timeless exhortation of spending less than you earn!

  32. SF_UK says 30 March 2010 at 10:38

    Kevin: what you say may be true about US student loans, but it doesn’t generalise. My (UK government) student loan definitely has compound interest, although thankfully the rate is comparatively low. But it is entirely possible for UK ex-students to be paying off their student loan, and the amount of the loan to increase.

    EDIT: that’s actually not true right now (although it has been in the past) as I just checked the current interest rates. They are pegged to inflation, and therefore are currently either 0% (for post-1998 students) or -0.4% (for pre-1997 students). So some people are actually seeing their balance reduce without making payments… (payments only start after an income threshold). I’m actually feeling cheated that I started my degree in 1998 and therefore “only” get 0% 😉

  33. jeffeb3 says 30 March 2010 at 11:06

    The first point is about the change in net worth, not the net worth itself. The amount it changes is the same as your cashflow.

  34. KittyBoarder says 30 March 2010 at 12:06

    Despide all the disagreements here, I still think networth is the best indicator how a person/household is doing financially. And majority of your networth should NOT come from your primary house. And I don’t count any personal properties (jewlery, cars, etc..) except if you own some artwork or pieces that worth substential amount of cash.

    Most of the networth should come from cash, bonds, stocks, business, and investment real estates. When you have about a million of that by 40 something, then you are in real good shape..

    I really think if most of your networth is in your house equity, then you got a long way to go before reaching financial freedom.

  35. Naomi says 30 March 2010 at 12:14

    #7 Chris Johnson:

    “I agree that the residence should not be part of that calculation in that it won’t produce income for retirement…”

    I would argue that a residence will produce income for retirement – a free place to live. Let’s say you own a house free & clear at retirement. You can either sell it and use the interest earnings to pay rent, or you can continue to live in the house with no payments.

    [I know there will be things like maintenance and taxes, so you could also sell it and buy a cheaper residence and use the balance as a reserve fund.]

  36. Patrick says 30 March 2010 at 13:32

    Either way you slice it or dice it – they are good questions to ask yourself. Even if you don’t track everything, be it net worth or your spending habits, regularly – it is a good idea to calculate them and understand why the numbers changed and what changed them.
    I think the question about the goals is also a very important one to consider. Things change in a year. Priorities shift. Make sure your finances shift accordingly.

  37. Rosa says 30 March 2010 at 13:42

    I’m still a little shocked that the 33% target for debt costs/income is a gross number, and not a net – our total expenses (debt, upkeep, food, insurance, etc) is about 50% of our gross and that leaves our savings/investment at a level that just feels adequate to me.

    It seems like in a time when most people expected to retire on pensions or their kids, 30% to debts including housing, 50 to current expenses, 20% to savings would be adequate for a normal budget – but since we have to save for both working-life downturns (expenses of small children, periods of unemployment, etc) and our postworking lives, the savings ratio should be a lot higher.

  38. Michiel says 01 April 2010 at 02:10

    Topic probably closed, but point 1 and 3 are basically the same. If you spend less than you earn, your net worth grows, and vice versa. Other people have remarked that net worth may be slightly tricky since certain types of assets may depreciate or may not be liquid at all, but this also applies to stocks, which you may be forced to sell at a loss when you need cash.

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