How to keep tabs on your financial health
Assessing your financial health is an important step in the personal finance planning process. It helps you to know where you stand in terms of your finances. Further, it helps you determine what adjustments you need to make to manage expenses, earn income, and ensure you’re progressing as per your financial goal planning.
Jul 2022
4 mins read
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Just like you need regular health check-ups to ensure your best health, you need regular financial planning to maintain optimal financial health. But first, you must understand what it means to be financially healthy.
The signs of financial health
| Stage | Activity |
| Goal Planning | Creating a financial plan and prioritising goals |
| Implementation | Observing, managing and recovering from ups and downs in finances |
| Automation | Using multiple financial tools |
| Diversification | Managing debts, investments and assets efficiently |
| Fund Creation | Building and maintaining funds |
| Money Control | Balancing income and expenses |
What to consider during a financial heath check-up
Once you’ve decided to do a regular financial check-up, it’s important to know which elements to assess based on your financial planning needs. We’ve compiled a list of 10 things you must monitor to save your personal finance from unnecessary ups and downs:
● Life changes – Has there been any major life change or incident? For example, a job change, marriage, house purchase, transfer etc. These major events affect your finances in many ways, so take into account how they change your circumstances.
● Goal planning – As part of your financial and investment planning, you set several goals or targets. For example, building a strong retirement corpus is a financial goal. Other goals could be building an emergency fund, saving up to pay for house purchase instalments etc. During your financial assessment, you need to evaluate your progress against these goals and adjust them as required.
● Budget – Your budget determines how you generate income and manage your expenses. Budgets are best reviewed monthly. Your aim is to ensure that you have enough funds to meet all your expenses and still have more to meet your financial goals. You can maintain your budget in an excel sheet or use an online software.
● Debt – This is an important element to review during your financial assessment. You can check your progress on how much debt you still have to pay and adjust spending to eliminate your debt fast.
● Credit – You can get your annual credit reports and check for discrepancies. In case you do find errors, you can report it immediately. It’s also a good idea to review your credit score periodically so that you can try to improve it in case it’s low.
● Retirement fund – As part of your financial health check-up, you must also check your investment for retirement planning to ensure you have a sizeable corpus to rely on. It’s also a good practice to evaluate your provident fund contributions. Consider factors such as your changing risk appetite and rebalance your investment portfolios if required.
● Miscellaneous savings – In case you have other savings goals such as building an emergency fund or house purchase, you may want to review them now. If you need to dip into your emergency fund for some reason, you must replenish those funds as soon as possible.
● Taxes – During your financial review, it’s important to keep track of all your tax deductions as well as credits for savings, medical expenses, donations etc. Keeping all your tax documents in one place is a good financial habit.
● Insurance – You will have different insurance needs at different points of time. Owning life and health insurance is a good way to avoid financial emergencies. You can re-evaluate the amounts and also bundle policies under a single company if required.
● Estate planning – Finally, creating an estate plan is an important step in your personal finance planning process. You can review your estate plan to ensure everyone is happy with your decisions. You can also review beneficiaries as well as assess your living will.
Conduct a financial health check-up in 6 easy steps
It’s ideal to schedule your financial health review annually or semi-annually. However, in case any of these 10 elements change in any way, it’s best to do an immediate review.
But how to conduct a financial health check-up? Here are 6 steps you can follow:
● Calculate all your ratios – To assess your financial health successfully, you need to calculate certain ratios, as follows:
| Ratio | Definition | Formula |
| Liquidity Ratio | It measures how much cash you have in hand to meet your regular expenses | (Cash + Bank Balance) / (Monthly Living Expenses) |
| Savings to Income Ratio | This is the ratio of the total savings & investments made to the total income earned | (Amount invested per month) / (Total income per month) |
| Debt Service Ratio | Captures a person’s ability to pay loan instalments regularly | (EMIs + other debt payments) / (Gross family income) |
| Solvency Ratio | This is a comparison of a person’s total liabilities and total assets | (Total financial assets) / (Total liabilities) |
● Determine your net worth – It’s important to evaluate where you stand in terms of your personal finance. You can calculate this by taking the value of all your assets and subtracting your liabilities.
● Review your housing scenario – A major chunk of your budget goes into housing. It’s important to know how much you’re spending on accommodation, and if required, shift to a less expensive home.
● Review your spending – Keep a thorough account of how much money is coming and going.
● Ensure your investments are aligned to your goals – It’s important to have an investment planning strategy so that you can match your goals with your investments.
● Set clear long- and short-term goals – The most important step of a financial check-up is to identify your long and short-term goals to guide your approach to achieving a financially secure future.
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All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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