Are My Personal Finances in Order?

Now-a-days, people have stepped into a digital scale where they keep a track of just about everything, be it your health, or finances. So if you are the one who is looking to find out whether your personal finances are in order or not, we’ve enlisted four signs that can help you know your financial well-being.

1. Emergency funds: Families or individuals who do not have emergency funds face a lot of emotional/mental stress in case of urgent need of money. They may face the unexpected expense and might end up signing up for a personal loan from banks to fulfil their obligations. This can lead to a cycle of debts and make it difficult for them to save in future. Thus a person with stable financial status will never have to go through this situation. Their emergency funds with help them come out of the sudden crisis with ease. Ideally, you should have 6 months of your take home pay saved. The more dependents you have, the larger an emergency fund cushion you should have.

2. Debt to income ratio (DIR): Finding out your debt to income ratio is worth in every sense as it can affect your future financing because banks usually gauge how well you manage your debts before approving your personal loan application. To pin down your debt-to-income ratio, add up your monthly debt payments and then divide the sum by your monthly gross income. If the result is 25% or less of your total income, understand that your finances are in order. However, if the DIR is more than 50% of your monthly income, it needs to be reduced at the earliest to keep your personal finances in a healthy state.

3. Credit Score: Your loan eligibility is greatly associated with your Credit score. The higher the score, maximum are the chances of you getting a personal loan and vice versa. As per the current rule, if your credit score is less than 750 out of 900, you’ll not be considered eligible for a loan. Other factors that can lead to personal loan application rejection include: if you have made too many inquiries or have availed too much credit in the recent past and if your repayment burden is already high. To keep a tab on your personal finances, it is wise to maintain good credit behaviour with your existing credit by making timely payment of all your credit card EMIs in full each month and make timely repayments on your existing personal loans or other loans.

4. Savings for retirement: Understand that your personal finances are in order, if you have enough retirement savings. To determine if you are on track, look at the percentage of your annual income you will be able to replace in retirement. This little calculation can help you get financially healthier in future. If your retirement savings is less than 40% of your current income, it is advised to start saving more every month. In case you are left with less money to save in a particular month, don’t hesitate, just save whatever you are left with.  To some people, it may sound impractical, but saving a little amount can also be helpful, especially if you begin to save in your early 20s. By 30 years of age, you must save at least 10% of your income and by 40s; your savings should be at least 50% of your monthly income. Retirement savings make you financially stable even in your older age.

These are quite a few things that can help you calculate whether your finances are in order or not.  Savings is necessary, no matter how little your income is. Start with small steps, chip away at your debt and boost your savings. It will make you a more secure person who is happier and lively.