Financial Wellness – What Are Your Personal Finance Vitals?

Financial Health & Wellness

Let’s talk about financial health and wellness. As PAs, we meticulously monitor our patients’ vital signs to ensure their well-being, but we don’t always take the pulse on our own personal finances.

In this article, I’ve outlined five financial vital signs that every PA should be tracking. Whether you’re a seasoned practitioner nearing retirement or just starting your journey in healthcare and staring up at the mountain of student loans you’ve accumulated, read on for the specific tools you need to ensure your financial health is thriving.

Financial Vital Signs

To determine how you’re doing financially, it’s crucial to monitor several key indicators that reflect your financial health and stability. These five financial vital signs will help you assess your current financial situation, identify potential issues, and make informed decisions for future financial moves. Here are the essential ones you need to know:

  1. Cash Flow
  2. Debt-to-Income Ratio
  3. Savings Rate
  4. Net Worth
  5. Financial Stress Level

Vital Sign 1 – Cash Flow

Cash flow measures the movement of money into and out of your life. Cash flow is calculated based on your income minus your expenses.

Cash flow is the heartbeat of your financial life, showing whether you’re living within your means or running a deficit.

Positive cash flow allows you to save, invest, and prepare for future investments, creating financial growth and more margin (read: wiggle room) in your money.

Negative cash flow can lead to debt accumulation and financial stress. When you are constantly running at a negative cash flow it’s mathematically impossible to improve your financial situation.

How to Calculate Cash Flow:
Take your monthly income and subtract all of your fixed and variable monthly expenses. Use this formula [Income – Expenses = Cash Flow] to calculate yours.

How to Improve Your Cash Flow:

  • Create a monthly budget to assess your income and plan your expenses. A monthly budget is a plan for your money where each dollar coming into your household has a plan.
  • If your cash flow is negative or you simply want your cash flow to be more positive, consider decreasing your discretionary spending or finding ways to boost your income.
  • For more consistency and less variability in your cash flow, take you out of the equation: automate savings with payroll deductions or automatic transfers to invest in your future. Saving first can help keep your spending under control.

Vital Sign 2 – Debt-to-Income Ratio

This is just as it sounds: your debt as compared to your income. This measures how much of your income is going to pay off debts.

If debt payments consume too high a percentage of your income, there may not be enough left for other essential expenses. Too much debt can hamper your ability to save for the future.

A debt-to-income (DTI) ratio below 35% leaves you with healthy financial flexibility. On the other hand, if more than half your income is going toward debt payments, it could put you at risk of missing a payment or being unable to meet other expenses.

If your DTI ratio is above 50%, work to bring it down as quickly as possible by paying down debt, reducing your monthly burden.

Remember, in addition to debt reduction, refinancing can be used to reduce your DTI ratio. Refinancing is especially effective when you can reduce your interest rate.

However, don’t get lulled into a false sense of security with refinancing. This is simply one step on your journey to eliminating debt all together. You still have to be diligent about cash flow, budgeting, and paying additional principal in order to eliminate debt altogether.

How to Calculate Your DTI:

Add up all your monthly debt payments (interest and principle, not any added principal paydown amounts) and divide this by your gross monthly income.

How to Improve Your DTI:

Decreasing debt and increasing income–focus on reducing high interest debt first and boost your income if at all possible.

Vital Sign 3 – Savings rate

According to the annual Consumer Expenditure Survey by the Bureau of Labor Statistics, as of 2021, American consumers spend an average of 85% of their after-tax incomes. That means the remaining 15% is left over for savings.

A negative savings rate isn’t sustainable, no matter how great your income! In order to build financial independence, a positive savings rate is a must. Furthermore, saving alone is not enough. That savings has to be placed in investments that, over time, outstrip inflation and build wealth.

These savings and investing can be attributed toward retirement, savings for a future purchase, funding your emergency fund, or any other savings goals you have.

How to Calculate Your Savings Rate:

The amount you save on a monthly basis as a percentage of your gross income. Use this formula to calculate your savings rate: [Savings per month/Gross monthly income * 100 = Monthly percentage savings rate]

Aim to systematically save a higher percentage month-after-month and year-after-year. Challenge yourself to save and invest 1-2% more in smaller time frames. This will help you to boost your savings, pad your investments, and not feel the pinch on your lifestyle too much.

Vital Sign 4 – Net Worth

To calculate your net worth: add up the market value of everything you own, and then subtract the total of everything you owe. Whatever is left (even if it’s a negative number) is your net worth.

Think of it this way: If you had to pay off all your debts tomorrow, selling off all of your assets to do so if necessary, how much would you have left over?

Watching how your net worth number changes over time gives a simple indicator of whether you are moving forward or backward, financially.

Why net worth matters: Many people shy away from looking at their net worth because they know they won’t like what they see. Student loans, mortgages on homes that have lost value, and other debts can overwhelm, but this vital sign gives you an indication of the level of financial freedom you have.

In order to achieve financial independence, your assets will need to provide you enough income to sustainably cover your cost of living, including any debt payments.

Watch your change in net worth over time. Is it increasing? Great! Keep up the good work.

If your net worth is decreasing or stagnant, take a good hard look at your spending and debt and ask yourself if they are making you stronger or weaker overall.

Vital Sign 5 – Level of Financial Stress

There are plenty of other financial health metrics that warrant a look, but the final one I cover here is your own personal level of financial stress.

On a scale of 1-10 (1 = never, 10 = all the time), how often do you worry about money?

Studies about stress and finances tell us that decreasing your level of financial stress over time is better for your mental health, wellness and blood pressure. Am I telling you that this vital sign–stress over money–can impact your other vital signs? Yes, indeed it can!

Now before you get the wrong idea about your level of stress being all about the money… Money isn’t actually the end game. When you are intentional, in control, have margin and are making progress, it lowers your financial and overall stress.

The bottom line here is that getting control of your money creates much needed margin in your life! It provides the opportunity for you to buy back your time and guard your energy closely.

These financial vital signs can help you to decrease your financial stress over time. The holistic picture of these metrics can help to improve your health and longevity!

Take Your Financial Vital Signs

Taking your financial vitals provides focus for your financial life in the short term.

Scroll back up to the top of this article with a pen and paper in hand. Evaluate your cash flow, debt-to-income ratio, and your monthly rate of savings. Calculate your net worth and monitor over time. Last but certainly not least, take a moment to tune into how your financial stress level is.

After you take this time to check in with your five financial vital signs, give yourself a pat on the back for the things that you are doing well.

When you have clear, simple metrics to track as you move toward or maintain financial independence, you can make your financial decisions with more purpose, clarity, and direction.

For every action there is a result; controlling your habits and behavior results in financial change. Getting your money under control, increasing your cash flow, reducing your DTI, saving more and growing your net worth over time–these things create margin in your life.

Once your money is in hand, under control, and moving in a positive direction, you can take back control of your time and your career.
 

Tracy Bingaman is a dynamic national and international speaker who helps clinicians land the biggest raises of their careers, scale their income, and achieve financial independence. From the depths of healthcare burnout, Tracy now has a job she loves with abundant time, energy, and money. As a thought leader on burnout, boundaries, and negotiation, she hosts the popular podcast The PA Is In, which recently celebrated 100,000 downloads. Tracy’s mission is to help clinicians redefine success in their lives and careers.