Every so often, you go to the doctor for a medical check-up. You do this because your health is important, and you want to make sure that you are doing all the right things to maintain it. If you are sick, the check-up will identify the disease and determine what needs to be done so that you are back at optimal operation. The same should apply to your finances.
Your financial situation is such an important determinant of success, you need to be aware of where you stand at all times. Experts recommend conducting a financial health check regularly, monthly or at the very least, quarterly. What factors should you consider when doing one? Let’s explore below:
Calculate your net worth
Your net worth is basically all your assets minus all your debt. Tangible assets include cash, investments and property, while intangible ones include intellectual property, trademarks and copyrights, among others.
If you have more assets than liabilities, you have a positive net worth.
When assessing your financial wealth, the focus shouldn’t be whether your net worth is positive or negative. Instead, look at whether it is growing or reducing. More importantly, work on increasing it by a target percentage each year by reducing the amount you owe and acquiring more assets.
Calculate your debt to income ratio
You can calculate your debt to income ratio by dividing the amount of debt you repay each month with your monthly income. If for instance your salary is Kshs 50,000 and you have monthly debts worth Kshs 19,000, then your income to debt ratio is 38% ((19,000/50,000)*100%)
Strive to keep your debt to income ratio below 30%, but it is even better if you can bring it down to around 20%. If it has surpassed 50%, your finances are in jeopardy. An easy fix for a high debt to income ratio is to increase your income. You should also work to manage your debt.
Understand what you spend money on
You need to know where every single shilling you earn goes. Keep track of all your expenses, even the little ones, and label them as either recurring or one-time spends. This process could be time-intensive, but it is the only way you will become financially healthy. Once you have a clear understanding of how you spend your cash, determine which expenses are necessary and the ones you can cut. Use that to create a budget and then stick to it.
Evaluate your investment strategy
Your investment strategy should be aligned with your overall financial goals. A simple way to test this is to ask yourself whether your investments are leading you to where you want to be. If this is not the case, you must reevaluate immediately.
Set financial goals
Having assessed your financial health, you now need to set new goals based on the insight you have gathered. Make sure your goals are realistic, specific to your situation and have timelines. Then, take action every day to get you closer to achieving them. Do this until your next financial health check.
While financial wellbeing is crucial for success, not enough people take the time to check that they are on track. Unfortunately, they end up failing to achieve their goals. To avoid being one such individual, ensure you assess your financial health regularly.