Do you have a yearly appointment to do a health check?
Our annual appointment with the doctor is a chance to check in with our body, ensure our health is sound, and start any preventative measures if there are signs of illness.
Using the same analogy, when was the last time you did a financial check-up?
Our financial well-being is important, just like our physical health, yet most people neglect to check in with themselves and do a regular review on how they’re doing financially.
Why Do a Financial Health Check?
Just like an annual medical check-up, a financial health check provides you with an opportunity to assess your current financial situation in relation to the financial goals you’ve set (if any).
Reviewing your finances at a regular interval means that you can make adjustments, where necessary, or even make different decisions as your own life situation changes as well.
The start of a new year can be a good time for you to take stock of where you are financially, so here are seven ways to do a quick financial check.
1. Balance your personal accounts
Just like a business aims to be in the black, so should you. The way to find out is to balance your own personal accounts.
Start by asking yourself how much money you made in the past year. For most of us, we may know the ballpark figure but not the exact number. If you’re doing well in your career, chances are every year you’re doing better financially due to salary increases, and perhaps bigger bonuses and incentives.
Take stock by adding up your salary and other bonuses, as well as any additional sources of income you may have. Then deduct what you’ve spent.
Ideally, of course, you haven’t spent more than you earned.
The second part of the equation, deducting all your expenses, is what most people have trouble with since they do not track every single expenditure. If you’d like to be more rigorous about your personal accounting, there are various apps available that can easily help you track your spending so that you know where every single cent goes.
2. Figure out what your net worth is
Building on the information you’ve collected in the first step, you can delve deeper into your financial standing by figuring out your net worth.
A simple way to calculate your net worth is to add together all your assets (for example, your cash savings, investments, property) and then subtract your liabilities (that is, any type of debt). This provides you with a quick reflection of what you own versus what you owe.
It’s important to note that income is not included in this calculation.
Here’s the key point of this exercise: the aim of calculating your net worth is not to compare yourself to others but to compare yourself to the past version of you.
How is your net worth trending? Ideally, it should be trending upwards, no matter what your starting point was.
If you’re in your 20s or early 30s, it’s likely that you currently have a negative net worth. That’s okay, as long as you keep tracking your net worth and see it growing over time.
3. Ask yourself how you can improve your net worth
Once you know what your current net worth is, the question to ask yourself is how to improve it.
In an “assets vs liabilities” situation, you can find ways to increase your assets, lower your liabilities — or both.
In terms of increasing assets, you can consider various ways to increase your income. You can also find ways to make your existing savings work harder for you such as putting it into an endowment plan instead of a fixed deposit account.
As for reducing your liabilities, look into ways of paying off your debt in a shorter period of time. This could mean readjusting your budget to increase the amount of debt repayment you do each month.
When it comes to consumer debt, you could also consolidate your debt and use financial instruments such as balance transfers which can reduce the interest payments on your debt.For more ideas on how to grow your wealth, you can look to lessons you can learn from multi-millionaires.
4. Find out what your debt-to-income ratio is
Here’s a calculation where your income does have a big role to play.
To get your debt-to-income ratio, you take your total monthly debt repayments and divide it by your monthly gross income.
Let’s say that your monthly gross income is $4,000. Your total debt repayments for the month, consisting of your car loan, student loan, and credit card payments, come up to a total of $1,600.
That gives you a debt-to-income ratio of 40 percent, which is higher than the recommended debt ratio of 30 to 35 percent.
If you do have a high ratio, it’s time to take action. A high debt-to-income ratio is an indicator that you may not have control over your debt, and it can negatively impact your ability to secure other forms of credit until you pay down your existing debt.
5. Review your monthly budget
To help you get in the black, it can be helpful to review your monthly budget.
The first thing to check is whether you’ve successfully kept to your budget. If you haven’t been able to, that’s an obvious area for improvement. It could be that your budget is unrealistic or you’ll been overspending in certain areas.
If you’re spending within your budget, the question is whether you can make your budget even leaner without sacrificing the lifestyle you desire.
Consider making small tweaks in your budget, where possible. Changes such as eating dinner in a nice restaurant once every two weeks instead of weekly or substituting your morning latte with a kopi siew dai can add up to big savings over time.
6. Check if you’re sufficiently insured
Protecting your financial future is a key component of your financial health. Aside from having an emergency fund, you can also utilise life insurance to protect you and your family against any unexpected events in the future.
Not having enough money can take an emotional toll, especially in times of crisis. Events such as accidents, critical illness, and death can cause stress and anxiety, and life insurance can help take care of money matters during these difficult times.
The insurance coverage you’ve secured in the past may not be enough to meet your current or future needs.
As you move through different stages of life, it’s good to take stock of your life insurance coverage to ensure that you’re sufficiently covered. For instance, your lifestyle needs may have changed or your family has grown — this would necessitate more insurance coverage.
A life insurance review can help identify the gap and ensure that you and your loved ones have enough financial resources in the event the unexpected happens.
7. Evaluate your short and long-term financial goals
It’s well and good to know how you’re doing right now… but more importantly, where are you headed?
So far, we’ve discussed your current financial health but the future is important too. How can you know which path to take if you don’t know your destination?
When doing a financial check-up, take the time to dream and visualise how you’d like your life to play out. What are some big life goals and achievements you’d like to experience? And how can good financial planning help you get there?
It’s great if you’ve already set your financial goals. A financial health check then becomes the time for you reassess those goals.
A difficult question to ask yourself is: are the goals you have the right ones?
For instance, the goals you set in your mid-20s may have fallen by the wayside as life went on and you might have taken a different path. So it’s essential to revisit and re-evaluate your goals to see if they’re still right for you.
If they are, then consider your journey so far. How are you doing in terms of progress? What else do you need to do to make your dreams a reality? What mistakes did you make and how can you do better in the future?
When assessing your goals, ask yourself it they are clear enough. Clear financial goals make it easier to carve a route of action and measure success. Prioritizing your goals can also be useful as you can funnel more money to the goals that are most important to you.