Personal Finance 101: Are you financially healthy?
If there is something all of us have had to pay closer attention to in the last year, it is the importance of staying safe and staying healthy.
But what about your financial health? How has that fared? Just as you are paying closer attention to your physical health and safety, there has never been a better time to understand your financial position.
Ask yourself the following questions to get started:
Do I know my personal net worth?
Do I know the ratio of my debts compared to the assets I own?
Do I know the ratio of my loan payments compared to my annual income?
Likely, to answer the above, you will want to do some health checks through a few simple financial statements.
The first is the Personal Financial Statement. This statement (see example spreadsheet below) captures the two things that determine your net worth: your assets (what you have) as shown below on the left and your liabilities (what you owe), as shown on the right.
Note: A balance sheet should always use the current Fair Market Value of an asset or what you would get if you sold it today and not what you paid at the time of purchase.
Once you have listed everything you own and what you owe, you will subtract your total liabilities from your assets' total value. This will give you your net worth.
As you can tell from the above, your Personal Financial Statement, and for that matter, net worth, do not look at your sources of income or your current expenses.
To assess those, you can create a very similar spreadsheet called the Statement of Cash Flows, in which you will list your sources of gross income and your current expenses, including any regular debt payments. You may also want to include on this the amount you regularly put towards savings and the expected amount you pay in taxes each year. Preparing a Statement of Cash Flows will help you quickly see whether you are spending more than your income.
For more insight on how healthy your finances are, you can run some beneficial financial ratios (discussed in another blog) on these statements that will help you track quarter over quarter or year over year your financial health. More importantly, these ratios can help you compare between time periods and benchmark where you should be able to achieve your dreams or meet your personal financial goals.
Generally, it is recommended that you prepare (or have a financial advisor prepare) these statements once a quarter. That way, you have a constant and up-to-date idea of your financial position, allowing you to make better, more informed decisions. These statements will help you see just how much you will need to contribute to retirement based on your current lifestyle or future goals or tell you how much life insurance or disability insurance you need to protect your loved ones.
We hope the above information gives you with some useful tools to understand your financial health and position. Luminous can also help you get and stay financially healthy. We work with each of our clients to continuously monitor how they progress towards achieving their hopes and dreams. In addition to our services, we also provide our clients with additional useful tools (at no cost) that provide real-time information, help with budgeting, lower debt, and do retirement and estate planning.