The 5-Step Financial Health Check
Have you ever heard the quote, “What gets measured gets managed”? Well this is especially true for your finances, yet 90% of Australians aren’t aware of how to measure their financial health and identify what they could be doing better!
Based on our experience, research and analysis there are 5 key areas that you need to get a handle on to get in control of your money and level up your finances:
This isn’t the most important thing, however it is vital to make sure you are getting what you are worth. Your income will also directly impact the amount you can borrow if/when you want to buy a property or leverage (use the banks money) to invest. It is important to remember that expenses are also scrutinized and impact this, even so your income puts a cap on your borrowing capacity. You have probably also realised now that Australia has a high cost of living so you need to make sure you are earning an income that can cover the necessities and leave some money left for the areas below.
These are measures of your debts and the ‘danger levels’ of what you have. This includes everything, such as your home loan, car loan, personal loan and credit card. If you have little or no debt currently that is great, however it is good to understand this area for future requirements (such as a home loan). There are two measures to be aware of here:
- How much of your take home pay is going towards paying off your debts (plus the interest that they accrue); and
- The amount of debts you have as a percent of your total assets.
Borrowing will provide you with more money now to purchase what you want, however will leave you with less cash in the future as you pay back the loan. Utilising debt effectively is a major factor in building your wealth, so it is extremely important to understand these key ratios and stay within healthy bounds.
This is really the first stage to getting on top of your money. Without saving there is no investing, and without investing there is no financial freedom. It’s really that simple.
We spoke about how your income impacts things above, however if you spend more than you earn you will be broke quickly. Improving your savings rate will help build your emergency buffer, get a deposit for your home and get you on the path to becoming truly wealthy. A good rule of thumb is to aim to save 10% of what you take home each pay (20% is ideal).
An easy way to get there is to start small (even a few percent) and increase this gradually as you get used to living on less. You can also increase this rate when you get pay rises so you don’t actually dip into what you currently earn. For example, if you get a 3% pay rise you can put an extra 2% aside, still have some extra to spend and know that you are boosting your bottom line!
Prepare for Emergencies
It is important to know how long you can survive without your current income – this is the equivalent of laying the foundations of a house. We are finding that the current environment has caused many people to realise that they were spending more than they thought on social activities, and they don’t have enough money to fall back on if their income stopped for a period of time.
Ideally, we want to get to have 6 months of your expenses sitting in savings that can be used for emergencies, however 3 months is a good start. There are also things you can do to reduce the risk of certain things happening – for example healthy people tend to get sick less – and you can take out certain insurances to protect against the things that you can’t control, such as bushfires, floods and cancer. Any insurances should be looked at as part of an overall plan – what are the high risks, what is the potential impact of these and what is the cost to insure them? Spending 3-5% of your total income to protect yourself, as well as building up your emergency fund, will ensure your financial foundations are in place and you can build your dream life on top.
This is the area that everyone wants to nail – it’s the one that people talk about and gets heads turning. In reality, this only comes about by doing the other things well. You want to be steadily increasing your net worth – after taking out the debts you owe – as this is what will ultimately provide you with a passive income in the future and allow you to achieve financial independence. The income from your investments will be able to fund your holidays, your business venture, charity work and anything else you want to do in your life.
There are so many things being written about money and finance these days that it can be hard to know what to focus on without becoming overwhelmed. We have found that the above 5 areas are the keys to improving your finances, feeling in control of your money and ultimately getting on the path to financial freedom.