No financial stress, living within your means, a manageable loan burden, a strong financial foundation and being on track to meet your long-term financial goals are some of the hallmarks of financial wellness.
Your financial wellness is important just like your physical wellness. Surprisingly, financial wellness has nothing to do with your income, net worth, size of the portfolio, asset allocation strategies, credit score, etc. But, learning and understanding how to maximise your wellness will definitely help you in the long run. Let us understand what financial wellness is and how to assess the same.
Financial wellness is no way connected with your balance sheet. It is actually a state of being as a result of the following: you are experiencing minimal or no financial stress; have a strong financial foundation and living within your means decently; having no high interest bearing debt and you are on track to meet your long-term financial goals. Many companies offer financial wellness programme to assess your own financial wellness. However, here are a few pointers that will help you assess what is your financial wellness status.
Are you financially stressed?
This is the first and foremost question you should ask yourself. Be honest while answering this question. If you are stressed about paying the credit card or other utility bills or feel burdened by high interest bearing debt then you are probably not financially well. This stress would obviously have an adverse effect on your physical wellness and thus lead to poor job performance.
Are you living within your means?
This is the second and most important foundation for your financial wellness. Living beyond your means can lead to increasing debt while living below your means can provide the savings required to meet your goals.
How do you check the same? Go through your bank and credit card statements and note down your expenses on a sheet or an excel including big ticket expenses such as vacations, holidays, etc. Divide this sum by twelve so that you will get an average monthly outflow. Identify where your money is going and compare it with what you are taking home every month.
Compute your debt to income ratio
Once you know what is your monthly cash outflow you can easily compute what is your debt to income ratio. It should be less than 20%. If it is touching 40% or 50% it is time to start worrying. This is one of the major sources of stress and can be a huge obstacle to achieving your long-term financial goals.
Look at the composition of your debt. The lower the share of debt like credit cards and personal loans, the better is it for you. Low interest loans such as housing loan or even a student loan can be of relatively higher percentage in your total debt structure. The point is that not all loans are equal.
How big is your emergency fund?
Your financial stress can be reduced to a greater extent if you have an adequate
emergency fund. How to arrive at an appropriate emergency fund? As you already know how much you spend every month, keep an amount which will cover at least three to six months of expenses. If your job profile is such that you think it may take longer time to find a new job, you should increase your savings to cover six to twelve months of expenses.
To conclude, by doing a financial wellness check-up, you will be able to determine what adjustments you need to make in your life from saving, spending and earning patterns. It helps you to live in the moment and enjoy the day-to-day pleasures like your children doing well, having good friends, good relationships, ability to go out, travel, etc.
(The writer is a professor of finance & accounting, IIM Tiruchirappalli)