A sound financial health is the key for ensuring you can stay focus on your career and lead a peaceful personal life. Any issues in your finances will bring many concerns to you. If not addressed at right time these concern can rise too high and sometimes disturb your peaceful life. So a regular check on your financial health is important to ensure you stay on course for a secure financial future.
A financial health check gives you a picture of your financial fitness i.e. how fit you are to reach the destination you have earmarked for yourself. If there are any gaps or issues that needs to be addressed, the financial health check will bring it in front of you so that you can take corrective measures. Although there are many aspects in personal finance which needs to be checked, some of them form the foundation of your sound financial health.
Below are those 5 barometers which you need to analyze to judge how good or bad is your financial health and what issues you need to address on priority –
Enough Savings Generated
You need savings for meeting your life goals and if you are not saving enough then how will you reach them. A detailed analysis of your savings will tell you whether your current financial situation is healthy enough. So if you are saving anything less than 10% then it’s high time you review your cash flows. Although your ability to save will change with changes in your financial situation, but at any stage of your life if you are not able to save at least 10-15% of your income, you will face difficulty in creating a secure financial future. This analysis of your savings also draws a picture of mismanagement in your cash flows i.e. about your income and savings. If you are not saving enough then it means majority of your income is being eaten up by your expenses . So you need to analyze which of your outgo’s is actually spoiling your financial health. It might be that you borrowed more than your repaying capacity or your lifestyle expenses are too high. Wherever is the problem, you come to know by analyzing your savings and then take corrective measures to bring it close to your requirement.
Networth Is Growing
One of the important barometer of your financial health is your networth. As you rise in your career, age and financial situation, your networth should be growing. An analysis of this element will let you know how your financial health is progressing. If your networth hasn’t grown for few years then it should cause a worry for you and a deep analysis is required to know where you are lagging behind. A simple way to assess your networth is to subtract your liabilities from your assets which will give you networth as of today. Even if your assets have not grown, the repayment of some liabilities, if any, should increase your networth. There are times when you may go lower in networth such as starting a business or availing debts for house purchase etc., but in general it should increase as you move ahead in life. Analyse your networth and see it is growing with you.
You cannot be financially healthy if you are not prepared for contingencies. What if any emergency knock your door- say a job loss or health issues? Do you have enough funds to sail through or your entire savings will be wiped out? Will your family be able to maintain same standard of living in case of any mishappening ? All these questions should be answered by you to know whether you have made enough provisions for such days. Contingency Planning will include creating emergency funds and buying the right kind of insurance i.e. life health and disability to give your family the right protection. Unless you do a contingency planning, there will always be a high probability that you or your family may have to borrow funds or dive into your savings. A contingency planning is a highly important barometer of your financial health since your family needs, when you are not there, rest on how well you have made provisions for them.
Growth In Investments
You are invested because you want to reach your financial goals. It is then necessary that your investments achieve a desired return so that you do not fall short of your requirement. Is your investment return good enough? Is it achieving what you planned when you start investing? Are you overexposed to any asset class thereby posing a higher risk for downside or your investments are diversified? Are you able to sleep well satisfied with your investments or it keeps you worried ? Are you rebalancing it periodically to stay on course? The answers to all these questions will tell you whether your investments are growing as you expected or you need to change them. If there is any shortfall, you will have to consider incorporating appropriate solutions to ensure the goals can be achieved.
Your Estate Plan
Have you checked your financial documents for who will get what assets and how, if you die today? Have you pen down your wishes in a Will so that no dispute arises among your family members? Are your nominees in the right place as per your wishes or they are different from what you have written in a Will? This review of your estate plan tells you whether your legal heirs will have a smooth transition which you wish to have. Unless you have the right nominee in all your financial documents the legal complications may arise as the succession law treats nominations differently. It may be also a time where you might be interested in reviewing your guardians for your child, your executors or trustees in your estate planning. Any horizon of more than 5 years demand reviewing of your estate planning documents.
Check on your financial health is highly important for ensuring you are taking right decisions. A financial planning approach is not just about money but finding means through finance to achieve what you desire – be it spending more time with family with a piece of mind or doing something which you aspire in life. Ideally, at threshold of every year i.e. Annually, you should review your financial health so that you can analyze what is that which will make you more happy next year. This can be about saving money, paying off debts, spending more time with your family or a change in your career. At the end each one of us are aiming for a mix between life and money.
When do you review your finances? Are you doing a complete fianncial fitness checkup?
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