Financial Check Up - Determining your financial status.

Financial Check Up - Determining your financial status.

Just as you are required to have a periodic physical health check, you are also required to have a periodic financial check to know your financial health status. Unlike a physical health check, a financial health check is pretty simple and can be done by you and not necessarily by a financial advisor/coach or professional.

How do I check the status of my financial health?

Essentially to know your financial status, you are required to calculate your net worth. Like most people, you may be thinking along these lines “Net worth! Isn’t that a term used for the rich for example high net worth individuals?” “Why should I calculate my net worth when I’m in debt or broke?” In reality, everybody should have a sense of their net worth.

Definition of net worth

According to Investopedia, net worth is defined as “The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health;” In simple terms net worth is

Assets – Liabilities

An asset can be defined as a valuable item owned by an individual or corporation that provides current or future benefits such as income or cash flow. Examples include land, property, cash, office equipment, art, jewelry, cars etc.

On the other hand a liability can be defined as an obligation of an individual/entity arising from current or past obligations, to settle a debt. In simple terms it is an amount owed by an individual or entity. Examples of liabilities include student loan, car loan, mortgage etc.

Your results: weak or strong financial health status

The objective is to ensure that your assets are more than your liabilities. If your assets are more than your liabilities you have a positive net worth however if your liabilities are equal to your assets or more than your assets you are in a weak financial position and are considered to have a deficit/negative net worth. People with a “substantial” net worth are known as high net worth individuals.

Do not despair if your financial situation appears weak, instead take this as an opportunity to begin to take the necessary steps towards achieving your desired financial position. As with health related issues, prevention is better than cure, also it is better to discover your illness early whilst there is still room for intervention and cure.

Importance of determining your net worth

Knowing your net worth and reviewing your net worth over time would help you know where you are in your financial journey. It would either provide confirmation of how healthy you are financially or act as a wake-up call or red flag in your financial health. It would encourage you to move towards your desired financial health status and help you set relevant and applicable financial goals.

Example of a personal financial statement (please note you can change the line items to suit you).

Personal Financial Statement for June 2014

ASSETS:

Cash                                                                                                                                                               N

Savings Accounts                                                                                                                ..................................

Current Accounts                                                                                                                ..................................

Cash value of life insurance                                                                                          ...................................

Certificates of deposits                                                                                                   ...................................

Treasury Bills                                                                                                                       ...................................

Money market funds                                                                                                        ...................................

Total Cash                                                                                                                             ....................................

Investments

Stocks                                                                                                   ....................................                 Bonds                                                                                                    ....................................                 Mutual Funds                                                                                         ....................................

Other investments                                                                                   ....................................

                                                                                                                      

Total Investments                                                                                                              ....................................

Personal Assets

Land                                                                                                                                         ....................................

Residence                                                                                                                             ....................................

Other properties                                                                                                                ....................................

Cars                                                                                                                                          ....................................

Valuables (Art, antiques)                                                                                               ....................................

Jewelry                                                                                                                                   ...................................

Other assets                                                                                                                         ...................................

Total Personal Assets                                                                                                       ...................................

Retirement Funds

Pension                                                                                                                                 .....................................

Retirement Savings Account                                                                                        .....................................

Total Retirement Funds                                                                                                  ....................................

Total Assets                                                                                                                          ....................................

Liabilities

Salary advance                                                          .................................

Overdraft                                                                    ..................................

Car loan                                                                       ..................................

Credit card balances                                              ...................................

Investment loan                                                      ...................................

Mortgage                                                                    ...................................

Personal loan                                                            ...................................

Forecasted Income Tax liabilities                     ...................................

Total liabilities                                                          ...................................

Net worth (Assets - Liabilities)                                                                                      ....................................

Key Tips:

• Always use current market value for the value of your assets and not historical cost i.e. the original cost of the asset.
•  Like companies try to keep a monthly, quarterly and annual personal financial statement. Once you have created the template, all you need is to make adjustments to the figures as they change.
• Conduct a periodic review comparing personal financial statements from one period to another.