I have attended one of the Investment workshop organized by “The Economic Times”,
Where I remember, an advisor from Baroda telling me,” Jigar, remember one thing, if you want huge success in your life, the key is to have a strong foundation. Be it be a career or personal finance”
I have reviewed many financial plans prepared by a professional. I was able to conclude only one thing. People with a strong foundation and knowing their current position were able to do a lot better than people who didn’t know it.
What is assessment of current financial position?
In simple words, knowing where you stand financially.
I will provide you different measures, ratios and thumb rule so that you can evaluate your financial position yourself without the help of an expert.
You can evaluate financial position based on the following parameters:
- Net worth Statement
- Income and expense statement
- Insurance Exposure
- Stability of Income
- Debt:Income Ratio
- Liquidity Test
Net worth Statement
It is just a basic statement that include your liabilities and assets.
Difference will be your Net worth.
It is important to prepare this statement as shown in this image. Once you prepare this statement, it will serve as a base for various ratio calculation.
Income and Expense Statement
You don’t need to have detailed overview, but a simple structure to start, just like this:
I can provide you more advanced templates, but it is not required at this stage.
Else, you will suffer decision paralysis.
Remember one thing,
Personal Finance is more of personal and less of numbers
By this you will have idea about how much money do you save, invest, EMI payment.
Just prepare a rough number, no need to do exact calculations.
You behaviour is more important rather than finding exact numbers
Just have basic idea about how much you save, household expenses, EMI, insurance payment and other expenses.
Insurance is one of the most missold financial product in India.
Just do this task, ask your father whether he has LIC Jeevan Anand policy?
LIC has created a huge campaign to sell this policy.
Not all require LIC Jeevan Anand policy, but as I said earlier, marketers are smart. They know how to sell you anything.
Prepare a list of insurance policies that you have. I have seen people who don’t even know how many policies they have.
Just make a list like this
Stability Of income
Knowing your income stability is very important before making your investment
Vishal Khandelwal, Founder of Safalniveshak.com, has rightly said,
If you are a bond, Invest in stocks. If you are a stock, Invest in bonds.
It mean that If you are doing a job and you have stable income you can allocate more in stocks.
But, If you are doing business or self-employed, your income level will fluctuate monthly, in such cases, you should allocate more in bonds.
Based on the above, decide the stability of your income. Again, no need to be too specific in earlier days. Just have an idea.
Debt: Income Ratio
Most prominent ratio to decide your future.
Debt: Income Ratio = Monthly EMI/Net salary(after tax) *100
This ratio suggest % of your income going in payment of loan EMI
If your income is 50,000 Rs. You are paying EMI of Rs 30000. Your debt to income ratio is 60%.
As per thumb rule of Pesonal Finance,
Debt to income ratio should be less than 40%.
If its higher than this, you just screwed up your finances. You should work on your finances you reduce loan.
Being in control of debt is very important,otherwise you can’t achieve F.I.R.E. (Financial Freedom & Retire Early)
Liquidity test: Total liquid Assets/Total Assets*100
To calculate this ratio, in net worth statement seperate head of liquid asset is given.
In corporate, this ratio is very important, but not so in personal finance. It is relevant when Liquid asset is compared with monthly income and not total assets. But as a measure, I have discussed it here.
This ratio can be used if you want to know that in case of emergency, how much money you can get instantly.
If you follow all this mentioned steps, you will be ready with following:
- Current Networth
- Total insurance amount
- Debt income ratio and whether you in control of your debt or not
- Stability of income
When I talk with people regarding their personal finance life, they don’t know how many insurance policies do they have, what is the sum assured and worst of all, there net worth.
Without this they can’t take any sound financial decision.