Your financial health is extremely important as it determines how well you will be able to achieve your goals and ambitions, and in turn improve your quality of life.
Your financial health is extremely important as it determines how well you will be able to achieve your goals and ambitions, and in turn improve your quality of life. You can determine whether you’re doing well, or need to pull up your socks by checking your progress with regards to certain metrics. Take a look at what these metrics are.
Setting a budget
This is a basic practice that you must follow, regardless of whether you are just starting your career or have been working for a while. In essence, it is simply a check you put in place to be sure that you are using your money judiciously, and not spending more than you can afford to. Consider it as the first step to good health, and if you aren’t doing this already, set a budget immediately! You can make it as detailed as you wish to.
Setting financial goals
Another important way in which you can assess your life basis your finances is by examining whether or not you have defined financial goals. It makes sure that your efforts are guided by a larger purpose and that you’re working towards a defined cause, instead of shooting arrows in the dark. To get started, set goals that cater to immediate as well as long-term ambitions. This way you will be able to save, invest and make money decisions in a more focused, driven manner.
Building a retirement fund
Planning for retirement is just as important as planning for expenses in the near future. Once you retire, the comfort you will be able to enjoy will depend largely on how well you have financially planned for your retirement years. Since this will be your only source of income, it is essential that you prioritise saving as early as possible. It’s best that you start as soon as you begin working, but even if you’re in your 40s, for instance, you can make up for lost time. By adopting a more aggressive saving and investment strategy, you can still build a sizeable corpus to finance your life post retirement.
Purchasing a home
A home of your own doesn’t just offer comfort to you and your family, it is also an important asset in your portfolio, and so it is another way to measure your financial wellbeing. Apart from saving on rent, having your own property acts as an asset, allowing you to raise funds against it in the future with ease. Besides, it is an investment that is known to appreciate in value, thereby providing you with another layer of financial security.
Measuring your debt-income ratio
While using debt is healthy, checking whether or not you’re using it responsibly is equally important. Evaluating your debt to income ratio will give you an indication of this. Essentially, the ratio is a measure of how much you earn and how much you owe. Typically, your DTI ratio should be less than 30-40%. It indicates that not all of your money is going towards tackling debt.
Calculate your net worth
Your net worth refers to your liabilities subtracted from all your assets. If this figure is positive, it is an indicator of good financial health. But, if it is negative, it means that you owe more than you own by way of assets. There isn’t a particular amount that is deemed as the ideal net worth, and so, the net worth you aspire to create should be in line with your short- and long-term goals.
Adhil Shetty (The writer is CEO, BankBazaar.com)