Can You Pass this Simple Financial Scorecard?
How much can a simple financial health scorecard tell us about wealth building?
More than you may think. Research by the Federal Reserve Bank of St. Louis indicates that personal wealth is closely correlated with basic financial health. The Federal Reserve commissioned a study of nearly 40,000 families to test this hypothesis. Five questions regarding basic financial information were asked. The results were then compared to the median net worth of the groups who participated in the study.
A scorecard such as this functions in much the same way as a physical. It provides a snapshot of your financial health at a given point in time. This feedback is valuable, as it offers a window into the fundamental state of your finances.
The results of the study were crystal clear. Those who did well on the scorecard consistently had higher net worth -- even controlling for variables such as education.
This raises an important question: If put to the test, would your financial health would earn a passing grade?
Let's look at the scorecard in more detail.
Action Plan: Can you pass a basic financial health checklist?
Successful wealth creation is a virtual impossibility without having the financial basics covered. To gauge the state of your financial health, ask yourself these five questions:
- Did I miss any payments or loan obligations in the last 12 months?
- Did I save any money in the last 12 months?
- Did I have an outstanding credit card balance after my last payment was due?
- Does my total debt service (this means both interest and principal) equal less than 40-percent of my income?
- Are at least 10-percent of my assets liquid?
If you answered "no" to questions one and three and "yes" to questions two, four and five, you've passed with the highest marks. The odds are excellent that your financial health is in strong shape.
If you failed to score as highly as you'd like, take immediate action to improve your score. Pay your credit card bills on time. Save money every month. Lower your debt service. Ensure you have access to significant liquid assets.
Do this, and you'll be in the best possible position to build wealth.