When you go to the doctor for a routine checkup, your doctor checks your vital health signs by taking your blood pressure and checking your heart rate and respiratory rate. Unfortunately, we don’t have such widely available diagnostic tools to check your financial health. But that doesn’t mean you can’t give yourself a financial health checkup.
In our prior post, What Is Financial Health?, we provided an overview of the six vital signs of financial health. Today, we’re taking a deeper dive into the first vital sign: income.
There are high-income households and low-income households, and higher is always better, right? Not necessarily!
Think of income as the food and water that feed your financial health. Eating and drinking too much can negatively impact your health. While too much income by itself isn’t harmful, how you handle your income is much more important than how much you make.
No matter how much income you earn, it’s important to spend less than you make. If your income is too low to cover your living expenses, you will have difficulty saving money and meeting your financial goals.
An important metric for measuring how well you handle your income is your debt-to-income ratio. You can calculate your debt-to-income ratio (DTI) by taking the total amount you pay in debt payments monthly and dividing it by your gross income.
For example, let’s say your monthly gross income (before taxes and other deductions) is $5,000, and you have the following debt payments:
· Mortgage: $1,000
· Car loan: $300
· Student Loan: $200
· Credit card #1: $200
· Credit card #2: $100
Your total debt payments are $1,800 per month. Divide that by your gross income of $5,000, and you have a debt-to-income ratio of 36%.
While every lender has their own definition of the ideal debt-to-income ratio, most prefer to work with borrowers with a DTI of 35% or less. Your debt-to-income ratio might not prevent you from refinancing your mortgage or getting approved for a personal loan, but you might want to improve that number if you want to qualify for the best interest rates and have a high credit score.
Whatever you do, you want to avoid a debt-to-income ratio higher than 43%. That’s the ratio at which borrowers are more likely to run into trouble paying their bills, according to the Consumer Financial Protection Bureau. If you’re in that range, you will have a harder time getting approved for new credit.
There are two ways to improve your DTI ratio: pay off debt or earn more income. If you don’t have the cash available to pay off any of your existing debts in full, increasing your income is the fastest way to see results.
What happens if you calculate your DTI ratio and realize you’re in the unhealthy zone – greater than 43%? Or maybe debt isn’t a big problem, but your take-home pay is barely enough to cover rent and groceries, let alone save for emergencies or a down payment on a house. Then it’s time to look for ways to increase your income.
Here are a few suggestions.
If you have a job, consider asking for a raise. Your boss might not have room in the budget to approve your request, but it doesn’t hurt to ask. Just be sure you research the salary range for your job first to see where you fall. If your current numbers are below average and you know you bring value to the organization, you have a better chance of getting what you ask for.
If you’re self-employed or a freelancer, consider raising your rates. Again, it’s helpful to do some research first, so you know the going rate for the type of work you do.
If a raise isn’t an option, consider whether you can earn more income elsewhere. Loyalty might be admirable, but it’s not always lucrative.
While the average employee might see a pay increase of 2% to 3% per year at their current job, it’s pretty common to get a pay increase of anywhere from 5% to 11% when you switch jobs. If you’re currently making $50,000, a modest 5% pay jump would mean an extra $2,500 per year.
The growth of the gig economy has made starting a side hustle easier than ever. You can drive for a rideshare service, walk dogs, babysit or deliver groceries on your downtime, turn your hobby into a business, re-sell thrift-store finds on eBay, teach music or dance, build an online course, or provide tutoring services, to name a few. The possibilities are endless, so if there is something you’re passionate about that serves people or solves a problem, look for ways to monetize it.
If your current skill set isn’t bringing in enough income, learn something new. With the online learning resources available today, you don’t have to go back to school to expand your skillset. Check out courses or certificate programs available through LinkedIn Learning, Skillshare, or Coursera. In a few weeks or months, you can learn a new skill that will make you more valuable in your current position or qualify you for a higher paying position elsewhere.
Do you love getting a big tax refund every April? You might be better off reducing your refund and taking home a bigger paycheck every month.
When you have too much money withheld from your paycheck, you end up giving the federal government an interest-free loan. That’s money that could be put to better use paying off debt or earning interest in a high-yield savings account.
We’ll cover the other vital signs in more detail in future financial health articles. For now, you know how to monitor your debt-to-income ratio and how to increase your income, and you’re better prepared to improve this crucial aspect of your financial health.
Janet Berry-Johnson is a freelance writer and CPA with a background in accounting and income tax planning and preparation. As a regular contributor to Business Insider, Money Crashers, and several other online publications, she helps make complicated tax and personal finance information accessible to readers.
Harvest helps increase the net worth of the 99% through artificial intelligence and financial automation. To date, Harvest has refunded over $2M in bank fees and interest charges to its members with the ultimate goal of increasing the net worth of everyday Americans by $1 trillion by 2030. Our platform starts with providing immediate relief through bank fee and interest charge refunds, orients a member's financial health with our proprietary PRO Index™, and keeps track of net worth over time aided by our suite of financial tools. Check out our 8-step guide on "How to Build Wealth from Nothing" to get started on increasing your net worth.
Disclaimer: Harvest is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.