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A simple path to financial fitness

Article brought to you by Ollo and authored by Shannon McLay, Personal Finance Expert and Published Author.

Getting financially fit is a much more complicated process than getting physically fit. The biggest reason is that most people know what weight or body type they need for physical fitness, yet most people have no idea how to measure financial fitness. Financial fitness can be broken down in numbers 740-50-15-35, where a 740 is a financially fit credit score, your credit card utilization is 50% or less, you’re saving 15% of your income and your debt to income ratio is 35% or less.

Financial Fitness Measurements

Credit score of 740 or higher

If you have a credit score of 740 or higher, most lenders would consider you financially fit. With a score of 740 or higher, you are considered an excellent credit borrower and you not only have access to various forms of credit like car loans, mortgages and credit cards with rewards but you also have access to these at lower interest rates than your less financially fit peers.

If you don’t know what your credit score is, you can check a number of free resources like Credit Karma or Credit Sesame; however, keep in mind that they do not provide FICO® Scores; instead the score provided may be a purely educational score, not one used by lenders. Many credit card companies, though, are now offering to show you your FICO Score for free, so if you already have credit cards, check with your current providers for your score.

Credit card utilization at 50%

At any given time, experts may suggest a financially fit person should not have more than 50% of their available credit on their credit card. Therefore, if you have a credit card with a limit of $1,000, you should have a balance of no more than $500 on your card at any given time. A higher credit utilization number does not necessarily mean that you are not financially fit; however, when you plan your spending on your cards, staying under 50% is a good target to maintain. A lower utilization number not only forces you to spend less, but it will also boost the credit utilization component that makes your credit score even more fit.

Saving 15% of gross income

Savings is typically an afterthought for most people, but if you make it a priority in your financial life, then you can adjust your other spending to accommodate this and you will not only grow your savings, but you will also make smarter spending decisions along the way. A good savings goal to shoot for is to save 15% of your gross monthly income.

Consider calculating this savings number and setting up an auto payment from your checking account to your savings account for this number. If you have emergencies and need your money, it’s easy to move back from your savings; however, creating this automation will ensure that the money actually makes it to your savings and doesn’t get spent from your checking account on other expenses.

A financially fit person will prioritize saving at a rate of 15% or higher first over other expenses; and if you’re saving at this rate, you are more likely to maintain a healthy emergency savings fund. A financially fit person has at least three months of living expenses saved in cash or a liquid account, and an even more fit person has six months. This is a hard goal to attain when you are busy living your life, but surprise financial events happen all the time and the best way that you can weather those with minimal stress is a healthy emergency fund.

If your emergency fund is not as healthy as it could be, then you are more likely to have to make financially unhealthy decisions like taking out more loans or running up high interest credit card debt to handle financial emergencies.

Debt to income of 35% or less

Your debt-to-income percentage represents the amount of debt that you owe in a monthly payment versus how much income you make. Banks may not be comfortable giving you a mortgage unless your debt to income is 35% or less. The lower you can keep this ratio, the more flexibility you have in making life and career changes.

If you build up your debts to the point where you require a high income to support them, then you will not have job flexibility should you want to make a change later in life. The best way that you can remain nimble, is keeping your debt in check. Financial flexibility is definitely a component of living a financially fit lifestyle.

This article is provided to you solely for education purposes. It is not intended to provide you with any specific legal, investment or financial advice and you should not solely rely upon this in making financial decisions.