Have you ever thought to do an assessment of your financial health? With all the crazy that has been going on, the impact on your financial health may have been significant. So let’s look at how and why doing a check-in is a good idea.
As you will know if you have been around this blog for any length of time, I’m a big fan of setting goals for your money, and one of the goal-setting processes is to look at where you want to be financially.
Hopefully, you will have identified at least one financial goal.
In order to understand the extent of what you need to do to achieve your financial goals, wouldn’t it be helpful to take stock of your financial health now?
So how do you check your financial health?
Your Personal Wealth Inventory
The first step I recommend you do is to understand your assets and liabilities.
Sounds simple, but for some reason, not many people actually take the time to understand their financial position.
Your assets may include items like your emergency fund, retirement accounts, other investment and savings accounts, real estate equity, share portfolio, education savings, etc.
Any valuable jewellery, such as an engagement or wedding ring, belongs here too.
Total the value of your assets and enjoy this number for now…
Next, you need to look at your liabilities which should include your mortgage, investment loans, credit cards, student loans, department store credit and any other loans you may have.
It is important to be thorough and ensure you cover all liabilities you may have…
Total the value of your liabilities and now you have an understanding of where you need to direct some attention…
For bonus points, you can also calculate your credit utilization rate. This is simply the value of your debt, divided by the value of the assets that the debt is funding.
Mortgage amount / Value of Home (or asset) = Credit utilization rate
This is a really helpful number to know, it can tell you if there is the capacity to borrow for more investments or emergency needs.
You are looking for your credit utilization rate to be below 80%… just as a guide.
Now you can also calculate your net assets by simply subtracting your liabilities number from your assets.
This gives you a guide of what you are worth, often referred to as your net worth.
If you have investments, it’s also a good time to take a look at how they are performing for you.
This is especially true when markets are undergoing a shift, as is happening now in some cases.
Check your asset allocation, that is, how much you have invested in each asset category, whether it is stocks, property, fixed interest or cash.
If stocks are taking a dive, for example, you may consider adding real estate investments into your portfolio mix to offset some of the volatility.
Then figure out which investments will do the best job of meeting your asset allocation goals – and whether your current investments still fit that profile. While a lot of people will argue that this asset allocation is a science that only the experts can do well, I would suggest that you go with an allocation that you are comfortable with.
Getting bogged down on how much to have in each asset class is not worth it, allocate based on your preference and adjust as you learn and see results. it doesn’t have to be scary or complicated.
Your Financial Goals
Next step is your financial goals…
If you have some, bring them out now, otherwise, it’s time to determine what your financial goals will be for the next 12 months.
You could break them down into short-term, medium and long term.
For example, short-term goals could be:
- Create a budget
- Eliminate credit card debt
- Create a financial freedom savings account
Medium term goals could include:
- Reduce consumer debt by 20% or whatever percentage amount is realistic but significant to you.
- Update your insurance policies
- Consider your dreams and include one here that motivates you, a new home, investment property, renovation of your home
And your long term goals, could include:
- Achieve a certain amount in your savings account
- Increase your investments by x%
- Develop an investment strategy, that is, how you plan to fund your investments long term.
Your Financial Health
Now you know your assets and liabilities, or your net worth…
You have an understanding of your investments, and…
You have some financial goals that you want to achieve.
How does that feel?
Completing this process will place you ahead of most others who don’t take their financial health as seriously as you do.
The next step is to understand what this process has identified for you…
Is your financial situation healthy, or does it need some attention?
Either way now is a great time to focus on your financial health and do whatever you can to achieve your goals over the next 12 months and beyond.
I recommend you concentrate initially on eliminating credit card debt or consumer debt. By eliminating this debt, you return power to your investment strategy and significantly reduce money stress in your life.
If you are want to take this planning and goal achievement to the next level, then you really need to be a part of my Investing Bootcamp. You can access the program using the links below. I can’t wait to see you in there and to be working with you to grow your financial health.