Understanding your financial position at any given time is critical to reaching your financial goals. In this post, I share 7 steps to expertly evaluate your financial health.
You probably get regular checkups from your dentist and doctor. Even cars and pianos require regular tune-ups. Most individuals fail to do the same for their financial health. While there are experts that can analyze your finances, most of us are entirely capable of measuring our own financial health. However, we either don’t think about it or choose to avoid it.
Determining the financial health of a company requires looking at several things. The same is true for your personal finances. Check out the video below.
As I shared in the video above, follow these steps and give yourself a DIY financial check-up:
1. Determine your net worth.
Your net worth is the number you’re left with after subtracting your debt from your assets.
The primary examples of assets are cash and other securities, the current market value of your personal property, and the equity in your home.
Essentially all of your debt is your liability. It’s the balance remaining on your credit cards, car loan, mortgage, and student loans. Any other money you owe would be included.
Note that a high net worth isn’t everything. You could have a painting worth $1 million on your wall, but still be struggling to pay your bills. Your cash flow is important, too.
2. Determine your cash flow.
Consider how much money you’re spending each month compared to the amount you’re receiving.
Total your household income and subtract your spending. Exclude any amounts you’re saving or investing.
A larger, positive cash flow provides financial breathing room and psychological comfort. A negative cash flow suggests you’re getting deeper into debt each month.
3. Determine Your Savings Rate
Consider how much you’re saving in relation to your income.
Divide your monthly savings by your income. Include any contributions to your retirement accounts, too. Most financial experts recommend a 15% savings rate. Obviously, a greater number will result in more savings.
If you’re saving less than 15%, strive to save more. Increasing it by just 1-2% each month will result in a healthy savings rate sooner than you may realize.
4. Determine Your Insurance Needs
Do you have the necessary insurance?
Different situations require different types of insurance. Asking yourself a few questions will help determine the types of insurance you need. If you ask yourself all the “what if” questions, you’ll have the necessary answers.
Protecting your home, health, income, and valuable assets are reasonable places to start.
5. Evaluate Your Liquidity
How much is in your emergency fund?
Could you weather the loss of a job, a major car repair, or any of life’s other unpleasant surprises? Experts recommend an emergency fund equivalent to 3-6 months of living expenses. That might seem like a lot, but you can start gradually a build bit-by-bit over time.
6. Evaluate Your Retirement Needs
How much do you expect to have at retirement?
There are plenty of calculators that will enable you to extrapolate the value of your nest egg well into the future.
Are you on schedule to retire with adequate financial resources?
7. Evaluate Your Future Expense Preparation
Are you prepared for major expenses in the future?
If you know your car is nearing the end of its lifespan or major educational expenses are coming, are you in the position to handle them?
Your answers to these questions will reveal the health of your financial situation. Pay close attention to your financial health. Putting a priority on your finances will result in choices that enhance your financial wellbeing. Click here to Schedule a FREE Money Mastery Call.
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