Assessing Your Financial Health

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I achieved financial independence in my early 40’s, when I was still mostly ignorant of traditional ways of assessing financial health. A high savings rate can cover for a lot of mistakes and ignorance.

stethoscope with money and a piggy bank representing assessing financial health

In my CFP coursework, I recently learned a number of measurements of financial wellness. Much of this information is new to me. 

As our family enters a new phase of life with less income and thus less margin for error, I’m going to start tracking some of these metrics. They include assessments of total wealth, liquidity, debt burden, savings rate, and retirement preparedness.

Others in a similar position may want to do the same. Understanding and tracking these metrics may also be helpful to those earlier on the path to financial independence.

Determining Net Worth

Net Worth = Total Assets – Total Liabilities (at a specific point in time)

A net worth statement is easy to prepare. Yet in my personal finances, I’ve never bothered to create one. 

I’m very debt averse, so I never had many liabilities to worry about. Our primary concern was amassing invested assets that could support our living expenses. I accounted for our daughter’s college savings separately. We mostly ignored the value of our home, cars, jewelry, etc.

Related: What Are the Financial Advantages of Home Ownership?

Going forward, I will do an annual net worth statement. 

Net worth is a good measure of your overall financial health and is the way to measure total wealth. Tracking your net worth periodically demonstrates how much your wealth is growing (or not) over time. Our net worth statement is also where we obtain information for other measures of our financial health.

To determine your net worth, first determine:

  1. Liquid assets (checking, savings, money markets, etc.), 
  2. Investment assets (taxable, retirement, college savings, etc.),
  3. The fair market value of personal use assets (home, car, jewelry, collectibles, etc.) 

List these assets from most to least liquid. Sum the subtotal of each of these three subcategories of assets. Then add these values to determine your total asset value.

Next determine total liabilities. They consist of the sum of:

  1. Current liabilities
  2. Long-term liabilities. 

Current liabilities are debt payments and estimated taxes due in the next year. Long-term liabilities are any debt obligations that will take longer than a year to pay off (the remainder of mortgage, car loan payments, student loans, etc.)

Assessing Liquidity

Liquidity has two components. They are the ability to convert an asset to cash:

  1. Quickly
  2. Without the potential for a price concession.

A checking account is very liquid. An ETF or mutual fund in a taxable account is less liquid. It could be sold quickly, but with risk that you may have to sell when its value is down. Your primary residence is not liquid because it could take months to years to sell and market conditions at that time make the exact value you would receive unknowable.

Two useful measures of liquidity are the current ratio and the emergency fund ratio.

Current Ratio

Current Ratio = Liquid Assets / Current Liabilities

The recommended target ratio is 1.0 to 2.0.

Using this ratio forces you to look at your liabilities. It allows you to better customize your planning as opposed to following general rules of thumb such as having an emergency fund of 3-6 months expenses when working or holding 1-3 years of cash in retirement to ride out bear markets. 

As noted earlier, we are debt averse. We have no debt other than credit cards which we use to earn travel rewards. We pay them off monthly. Property taxes on our home are relatively low. Our current ratio is several multiples of what is considered healthy, even though we don’t hold a lot of cash.

In contrast, some people argue for not paying off a mortgage and using debt to finance cars with low interest rates, even heading into lower income retirement years. Assessing liquidity suggests that if following these strategies, you should hold more liquid investments and accept the paltry interest associated with them. The alternative is to accept more risk that you will have to sell assets at depressed prices.

Emergency Fund Ratio

Emergency Fund Ratio = Liquid Assets / Monthly (Non-Discretionary) Living Expenses

The recommended ratio depends on your circumstances. A general rule of thumb is to have 3-6 months expenses in an emergency fund. A family with dependent children and a single high earner may want to have 12 months of expenses saved. A retiree may want to have several years in liquid assets.

I appreciate the emphasis on non-discretionary expenses in this definition. I encourage you to put serious thought into that as you look at your spending.

Related: Budgeting or Expense Tracking — How Much is Enough?

If a large percentage of your spending is on luxuries (travel, restaurant meals, charitable giving, etc.) that you could temporarily eliminate or do for less cost, you may need less liquid assets in an emergency fund. 

If most of your spending goes to necessities and liabilities you’ve committed to, you need more liquid savings or be willing to accept more risk of having inadequate liquidity.

Assessing Debt Levels

Our household has always been debt averse, maybe to a fault. So I won’t be spending much time with the following measures in our personal planning unless our approach evolves over time.

I realize that our approach is rare in today’s world, and possibly extreme even in the population of financially literate people reading this blog.

So let’s review a couple of measures to help you assess whether the amount of debt you hold is healthy. We’ll also examine one debt metric that is important for all of us to understand.

Debt to Asset Ratio

Debt to Asset Ratio = Total Liabilities / Total Assets

There is no recommended “healthy” ratio. Rather, this is a good number to monitor over time to track your progress. Generally a ratio that is trending lower over time is desirable.

This could be a helpful measure of your progress if you are investing while simultaneously paying off debt because this measure, like net worth, incorporates both assets and liabilities.

It is also a useful measure for those who will maintain debt into retirement. You likely will have less income than in your working years, and assets will be needed to pay any liabilities.

Long Term Debt Coverage Ratio

Long Term Debt Coverage Ratio = Annual After Tax Income / Annual Payments Due On Total Long-Term Debt Payments (Mortgage, Car loans, Student loans, etc.)

If it is more practical and intuitive, you could also use monthly income and debt expenses.

A ratio of <2.5 is considered a red flag that if income is disrupted, you may quickly have a hard time covering your debt obligations. The higher the ratio, the better equipped you are to manage your debt.

Total Long-Term Debt as a Percentage of Gross Income

Your total debt as a percentage of gross income is calculated as:

Long Term Debt % = Total Monthly Payment for Long-Term Debt Obligations / Total Monthly Gross Income

This measurement is important for several reasons. First, this ratio determines “how much house you can afford” in the eyes of a lender.

On FreddieMac’s website you will find the recommendation that “you should spend no more than 28% of your monthly gross (pre-tax) income on your mortgage payment, including principal, interest, taxes and insurance.” Similarly, there is a widely accepted recommendation that your total monthly debt payments should not exceed 36% of your gross income.

It is important to understand that these are not hard and fast rules meant to protect you! They come from lenders. These recommendations of “how much you can afford” protect them. They have the statistics and want to limit the number of people who default on their loans.

If you are looking to build wealth quickly, limit your biggest expenses which are typically housing and transportation funded by debt. So you want these percentages to be as low as possible while providing a satisfactory lifestyle.

There is a second implication of understanding these “rules” related to debt percentage. If you are approaching retirement and are considering purchasing a home or opening a home equity line of credit, it will likely be easier to get credit prior to retirement when you have more income.

Related: Getting a Mortgage When You Have Assets But No Income

Finally, understand that there are advantages to using debt, particularly when rates are extremely low. You may want to take more debt than these income focused rules would suggest is prudent if you have the assets to pay the debt when necessary.

Measuring Savings Rate

Savings Rate = Annual Savings / Annual Gross Income

If it is more intuitive, you could use both monthly savings and income.

The commonly accepted recommendation is to have at least a 10% savings rate.

I recently wrote about why understanding the concept of saving rate is so important, the psychological benefits of having a high savings rate, and specific tactics that enable achieving a high savings rate. I regularly share that in our household we had a 50% savings rate.

Conceptually, this is an extremely important concept to understand. Here is our dirty little secret. I’ve never actually calculated our savings rate. I’ve read and listened to FIRE bloggers who get very focused on optimizing their savings rate, seemingly at the expense of joy at times.

Early on, we didn’t understand tax planning. So we roughly saved 50% of our after tax income, which is actually less than a 50% savings rate when factoring in taxes we paid. In later years, we eliminated our mortgage and were fully utilizing all tax-advantaged investment accounts we had available, so we saved well over 50% of our gross income. 

Some years, we traveled internationally, attended Super Bowls, or purchased big ticket items like outdoor gear, home improvements, or even cars with cash. Those years, we saved less. 

Other years, we went backpacking locally and didn’t make any big purchases. Those years we saved more. 

Bottom line: we kept structural expenses low and saved a lot more than 10%.

If you’re struggling with saving, calculating and tracking your savings rate over time can be extremely beneficial.

If you already have a very high savings rate, I don’t think it much matters if you’re saving 60.4% vs. 63.2% of your income. There is a risk of losing sight of what is important.

Assessing Progress Towards Financial Independence

The one measure we‘ve used in the last decade to assess our financial health was not taught in my CFP coursework. It is rarely discussed outside of FIRE blogs. Like savings rate, I think it is extremely valuable conceptually.

We regularly track our investments as a multiple of our annual expenses. This is expressed as:

Investments as a Multiple of Expenses = Total Investment Value / Total Annual Spending

This is simply the inverse of the idea that you are financially independent when you can take a percentage of your assets from your portfolio indefinitely without exhausting the portfolio. For example, the inverse of the “4% rule” shows you need to accumulate 25 times your annual spending. 

The advantage of this metric over net worth is the perspective provided by understanding how long your money may last, based on your spending. Every dollar you won’t spend in retirement is 25 dollars you don’t need to accumulate if you are assuming a 4% safe withdrawal rate.

Most recommendations regarding how much you need to retire use a percentage of your income in your working years. Rules based on income are fairly accurate for many people, because most people, regardless of income, spend most of what they make and save little. But those guidelines ignore the fact that…. you have the choice to not do that!

There are downsides to tracking your investments as a multiple of spending. Seeing the impact spending has can encourage you to focus too much on frugality, cutting spending to a fault. 

Overemphasis on minimizing spending can also lead you to put on blinders as to how much you will spend in the future on things like health care. This can lead to poor assumptions that can come back to bite you.

How Do You Measure Financial Health?

Clearly there is no one perfect measure of financial health. Each of those I chose to discuss highlights one component of financial wellness and ignores others. None is perfect.

Still, it is worth having a few metrics that measure those things that are important to you and that do so accurately.

What metrics do you use to monitor your financial health? Which metrics have you found most valuable and why? Let’s talk about it in the comments.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to Financial planning inquiries can be sent to]

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  1. For most of my life, I was very irresponsible. As a ‘Child’ of the 60’s, I grew up with the philosophy of “Drugs, Sex, and Rock and Roll” (Still have that tattoo on me). During the 80’s, 90’s and the new century, I made fair money as an information security engineer at a Fortune 500. But the more I made, the more I spent. Into my 50’s I was deep in debt because of my decade’s old lifestyle. Around the time I turned fifty, the economy collapsed. A wake-up call – I thought I was hot – I was an ‘expert’ in the information security field, getting calls from recruiters daily. But when I was laid-off because of massive corporate cuts, I found out you are not what you thought you were. I ended up unemployed for four years. Nobody wanted to hire a 50+ man. I eventually took a job with more than a seventy percent pay cut. At fifty-five, I took a pension buy out, cashed out my 401K and paid off all my debt (But of course, I paid massive taxes – But I was free!). In my 50’s I started out from zero. For the next several years, I lived within my means. Eventually, I started saving and investing half my paycheck. My only worry was my home. I purchased it at the peak of 2006. It was down as much as fifty percent. I was deep underwater. I was able to refinance (Thanks Obama!) at a better rate. I continued to save and right before the onset of COVID at 58, I decided to retire (I was fed up with my job, but I had no other options). Between the small pension I received from that job, and what I had invested, I live comfortably within my standards and means (Better than many, not as luxurious as few). With the recent uptick in real estate prices, I sold my home, and it gave me a fair buffer, which I invested in stocks. Now I rent. Lovely place, in a genuinely nice neighborhood. My biggest expense outside of rent, is health insurance (Once again, thanks Obama! – It was double before it). Long boring story, I know. But moral of the story is, you can always come back from behind. And no, you do not need millions to retire (Yes, I understand I have a pension, but if you think $1200 a month is a lot…). Most important advice from my life experience is to be debt free and live within your means. The longer you do this, the better you will be. Money is not everything, but enough money to live a lifestyle you are comfortable with, without having to work, with the freedom to do as you please, without you having to bow down to someone every day of your life, is everything. And… It is NEVER too late. Just get started today! The future gets here a minute from now. I have been retired now for three years (61) and I am enjoying life to the fullest. Once this COVID nightmare is over, I am looking forward to my original retirement purpose… To travel around the world – While I can still walk! 🙂

    1. Outstanding story! Love to hear how you manage your withdrawals, what your expenses are, etc. I am considering selling and renting. I think it’s a great move.

      Best of luck!

      Chris — as always great article and many thanks!


  2. I wonder how many people do have the discipline and knowledge to track even a few of the important financial matters. Not many outside the personal finance community and I have to admit I didn’t track anything until a few years short of retirement. Fortunately I had over-saved and invested well, so in retirement money is no issue at all. But its good you are pointing out the importance because many people won’t check until their mid fifties, like me, only they won’t be pleasantly surprised, they’ll just be surprised! People who take finances seriously will be in far better shape than those who leave things to chance.

    1. Excellent comment steveark. Our experiences sound very similar, only that I came to the same place as you earlier.

      Those like us may benefit from it, but as I noted in the post, I’ve seen people get so focused on numbers that they lose sight of what is actually important. And those that most need this information are likely not reading blogs like this one.

      I struggle with how to frame this information. There are likely people between these extremes who will benefit, and that is why I try to give some context by sharing how we’ll use these metrics so using them will help rather than harming.


  3. I think the above description of liquidity is a bit broad from a technical standpoint, although perhaps this is fine is terms of how individual investors should think about it. I think of liquidity as the ability to convert an asset to cash without distorting the overall market for that asset due to the fact of your sale. This is distinct from whether asset prices in that market are volatile. Also, liquidity often depends on the level of trust in a marketplace. Perhaps this is my academic bent showing, but I wanted to chime in!

    1. Stephanie,

      I appreciate any feedback, but yes I’m writing in the context of individuals looking to save, invest, plan, and prepare for their own particular goals based on their individual circumstances. That’s probably more than enough for most of us. 🙂


  4. I track everything. I still make a lot of financial mistakes but since I track everything I have been able to plot a number of corrective actions faster and have been able to turn trends around in 3 months. All the learning from mistakes is painful though. I have had more than my share or liquidating assets at the wrong time for a lower price. Chris, Darrow, do any of your books contain practical case studies for clumsy people like me (that have made many blunders and are close to retirement)? All of your articles are great but I feel like they are all hindsight for folks that at closer to retirement.

  5. Sure enjoy reading your articles………..Should a generous pension or an annuity payment be somehow included in one’s net worth?

    1. JK,

      I would certainly consider that an asset. The best way to do that would be to calculate the present value of the anticipated or current income stream.


  6. I’ve been tracking net worth for more than 20 years and use a fairly detailed spreadsheet to do it. With the exception of book values for our vehicles, boat and RV which are done annually, I update the numbers quarterly. That’s done not only for our own knowledge in tracking our financial status but because the document would provide our kids with a detailed snapshot of our financial situation should something happen to both Alan and me at one time. I have to admit, Chris, net worth is the only metric I use of all of those that you mentioned. But I use another one that you didn’t – How well can we both sleep at night? It might not be numbers or formulas, but it’s very telling just the same.

  7. Key metrics I track are net worth, ballpark total savings per year, ballpark total spend per year (essentail and discretionary separately) and portfolio percentage distribution. I would track debt too but we don’t have any. I have a ballpark idea of what these numbers are each month and total for the year by glancing our statements. Been doing this for around 20ish years and never felt I needed to do anything more fancy (but I have on occasion for fun).

  8. While I agree with your statement, “I’m going to start tracking some of these metrics. They include assessments of total wealth, liquidity, debt burden, savings rate, and retirement preparedness”, I believe you left out one important metric that needs to be tracked, and that is Expenses. It is one of my most important ‘metrics’. For our Expenses tracking we use YNAB (You need a budget).

    1. I wasn’t thinking along those lines, but I do agree with JC. I’ve been tracking our expenses since before I escaped from the workforce. At first, it was to be sure we could swing early retirement; now it’s a habit that ensures we don’t stray too far from our spending goals.

      1. Yes! Just as the net worth statement is the source of data for a number of the ratios, so is knowing your personal spending. I suppose I just assumed that tracking expenses is a given since I’ve written about it so many times in the past, but I absolutely agree with both of you and thank you for pointing out my omission.

  9. I recently retired at 57 and a half used a lot of the metrics shown in the column. I have lived semi frugal my whole life. Retiring at this present state with the world so crazy has given me a lot of angst. I know I have to keep myself centered and look long term and not get hung up on short term market wows.

  10. Nice article Chris. Like Darrow, I’m a retired engineer who developed a strong interest in personal finance. I’m a long time reader and truly enjoy the blog. When I was about four years from retirement I enrolled in the American College’s CFP program, and completed it withinI a year. It really helped me think about our retirement. I stopped working April 2017 at 59. I then signed up for American College’s RICP program. I’ve ben using a family balance sheet (Net worth) and statement of cash flows (income/expenses) since I started my studies. Every January my wife and I have a ‘State of the Union” meeting where we review everything and make decisions about our spending and plans for the coming year. As others have suggested, aI think a balance sheet and statement of cashflows are a great, and fairly easy way to track your financial health.. You can use these to calculate the other ratios you describe.

    1. Thanks for chiming in RCC. I suppose I had some of these measures that are new to me front of mind. As with tracking spending, we have been tracking cash flows since I left my job, income has become irregular, and we go back and forth b/t being savers and spenders from month to month. I’ve written about that here:


  11. I like the ratios. I am used to current ratio from analyzing companies but never looked at it from an individual person. I also like the emergency fund ratio.

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