Financial Health

Are You Financially “Fit”?

“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb

The best things in life truly are free. Your health, your spiritual well-being, your friends and your family are all things that are priceless and irreplaceable. There are many sites that will help guide you on the path to fitness. They will help you establish more fulfilling relationships with your spiritual self, your family and your friends. This site is not one of them.

If, on the other hand, you are looking to answer questions such as:

  • Am I saving enough money to retire?
  • How do I make more money? How do I spend less money?
  • Can I afford a bigger house? Do I have the right type of life insurance?

…then you have come to the right place.

This site will help you  in that journey to improving your “financial” fitness. Whether you are an Olympic Level “financial athlete” or just starting out, these pages will provide you with simple tools to identify and achieve your financial goals. They will give you the basic steps to become (more) financially “fit”.

So…Are You “Financially” Fit?

As with your physical health, your first step is to take stock of your financial health – take some time to find out where you currently stand. In a world where fiscal fitness is almost as important as physical fitness, a regular financial health check is critical. Just as you should not ignore a health warning nor avoid a medical check-up, you need check up on your finances frequently. This is especially if they are already in a “poor” state.

What is a “Financial Health Check”?

A “financial health check” can help assess whether your finances are in good shape. With some basic information, it is something you can do fairly quickly.

The initial exercise is simple. It is a matter of writing down the key financial details in your life;

– Your assets (list everything you own – such as a car, a house and a positive bank balance)

– Your liabilities (list everything you owe – such as a car loan, a mortgage or a credit card balance)

– Your income (list all the ways in which you have money coming in – such as a salary, interest income, rental income etc.)

– Your expenditure (list all the ways in which you have money going out – such as food expenses, school fees, rent etc.)

  • Cash and Cash Equivalents
  • investments
  • Retirement Accounts (EPF, ETF)
  • Real Estate
  • Motor Vehicles, Jewelry and other property
  • Loans and Credit Card Balances
  • Unpaid Bills and other amounts owed
  • Car loans, Student loans and Debt
  • Mortgages
  • Salaries, Tips and Commissions
  • Interest Received (on deposits)
  • Dividends (from stock/shares)
  • Property Rental and other income
  • Daily Personal Expenses and Bills
  • Interest Paid (on loans and mortgages)
  • Rents paid & household expenses
  • Term life and Car Insurance expenses

Make sure you leave nothing out, not even your casual weekend spending.  If you don’t have exact information, use estimates. You can improve the accuracy of these estimates step by step.

You will also use this information to calculate certain key numbers or “financial ratios”. These ratios will help you determine whether your financial health is in line with other folks in situations similar to yours. Analysis of this information will let you know where you stand and will then form the foundation of your financial plans for the future.

The 3 Key Questions You Need to Answer Now

Once you have collected your financial information – you need to assess how well you are currently performing. Similar to a cricket game where you check whether your current run rate is in line with the required run rate, any financial health check starts by asking the following key questions:

  • What is your current “net worth”? Is it growing?

Calculating your net worth involves adding up the value of all your assets (as positive values) and liabilities (as negative values) – that is your “net worth” today. This is a number that changes every day. It changes based on your earnings and spending. Comparing the current number with a similar calculation from a previous time period tells you a lot about your financial fitness.

For example, real estate, investments you have towards retirement or cash you have saved for an emergency should all be written into the “asset” column. Credit card debts and a mortgage are examples of “liabilities” which are offsets to your assets. The difference between your total assets and liabilities, i.e. your “net assets” is also called your “net worth”. There are many online tools to help you with this net worth calculation.

If you also have the information for previous years, it becomes easy to compare to see if your net worth is growing and decide whether you are in a better position than the same time a year ago.  A drop in your net worth isn’t always a bad thing, but you want to understand why it has dropped. For example, it could be because you invested in your education, or a temporary change in property prices, but it is important you understand why it has changed and whether that change is expected to reverse or continue as time goes by.

  • Are you spending more than you earn?

A quick calculation will also tell you whether your expenses are more than your income. If they are, you should identify the sources and uses of your funds. Your life style may have changed recently due to a significantly event (such as a marriage, the birth of a child, purchase of a new home), it is likely that you will need to re-evaluate your income and expenses. If you are in fact spending less than you earn – are you saving enough? For example, if you are in your later 20’s or early 30’s you should aim to save at least 15% of your income, and if you are approaching retirement, you should be saving significantly more.

  • Are you managing your financial risks?

Even if your net worth is growing, you may still be exposed to risks that can adversely impact your financial health. For example, your debt-to-income ratio may indicate if you are carrying too much debt. This ration is calculated by dividing your liabilities by your income. If this number is high (i.e. you have a lot of debt relative to your income), it indicates that you are exposed to risks if your income level drops unexpectedly. Whilst your current level of debt may be manageable, do you have emergency funds or sufficient insurance for your health and other needs? If not, you may quickly be at risk if you lose your job or a key source of income or have a significant unexpected expense.

How Much is “Enough”?

The answers to the questions posed above, along with a few of the indicators below will help you begin to understand your current position. Some indicators that you are in “good shape” are:

  • You are saving between 15 to 40% of your yearly earnings
  • By age 40, you have saved between 1 – 3 times your yearly income
  • You are spending less than 30% of income on debt re-payments
  • Your primary home is worth between 2 to 4 times your annual income
  • You have cash savings to cover 6 months’ worth of expenses

Whilst these results are very broad indicators on whether you are in good shape or bad. Use the results of your specific check-up to help build a financial plan. Just as with any fitness program, these goals must be realistic and in line with your life goals. From time to time they may need to be adapted due to changing circumstances.  Your goals in your 20s will be much different from those if you are in your 50s.

Write this plan down. Break each main step into smaller steps. This will make it easier for you to know whether you are making progress at any point in time.

This financial plan is your first step towards becoming more “fit” financially.

How do I Build a Financial Plan?

Building a financial plan involves setting financials goals and working on a budget. As a nation, Sri Lankans don’t have easy access and training to the tools to take the steps necessary to assess and improve our financial health. Sri Lankan schools, especially at the primary and secondary levels, do not teach personal finance and money management skills.  Further, Sri Lanka does not yet have all the financial safeguards, laws and oversight necessary to to protect the financial health of all its citizens. This makes it even more imperative that you are aware of how to make the best financial decisions for you and your family.

Take the next step – Click here to learn how to set up your personalized financial goals.