Have you ever stopped to ponder how secured you will be financially as you grow older? Getting a financial health check is important, though it is something many never do often enough.
But imagine if you could quickly spot the gaps in your finances and set a few easy plans down that could save your finances thousands? That’s essentially what the financial health check is all about. Ready to do the money-talk? Here are five financial health check questions to ask yourself.
What is your net worth?
Net worth is the value of everything you own. This includes both your financial and non-financial assets excluding the total outstanding liabilities – your debts. Knowing your net worth can be of great use as it indicates your financial health status and allows you to act on it. For example, if your net worth is negative, you will be able to better plan your finances in the future. Here’s how to calculate your net worth:
Step 1: Calculate the value of your assets. This includes cash sum, investments, properties, account savings and your Employee Provident Fund (EPF).
Step 2: Calculate the total sum of your liabilities. Examples of liabilities are mortgages, credit card balance and loans.
Step 3: To calculate your net worth, simply subtract the value of your assets to your liabilities.
Total Assets – Total Liabilities = Net Worth
But knowing your net worth isn’t sufficient. You should set a net worth retirement goal. To find out your ideal net worth for your current age:
(Current age) x (Annual income ÷ Number of years until you retire) = Target Net Worth
Identifying your net worth goal will help you to plan and save up for your retirement efficiently. Here is an example of calculation to get you going: 35 x (120,000 % 25) = RM168,000. Are you close to the target net worth for your age, or still have a long way to go? Should you start reducing bad debt, or invest more to increase your net worth? Whatever the answer may be, you now have a better idea on how to move your finances forward from today onwards.
What is your debt-to-income ratio?
Thinking of investing in a property to help meet your targeted net worth when you’re 50? Before you start, check to see if you can afford it in the long run. The debt-to-income ratio is calculated by dividing your monthly gross income from the total debt payments. Your debt-to-income ratio is essential as it plays a role in your credit score and in acquiring new credit. It also helps to identify your debt status. A recommended debt-to-income ratio is 30 percent or lower. Here’s how to calculate your debt-to-income ratio:
Total monthly commitments ÷ Net income (after tax, EPF, SOCSO)
The higher the debt-to-income ratio, the higher your debt – and this can help you firm up your future decisions even more. If you’re unsure what to do with your current debt standings, you can check out our Strategies To Pay-Off Your Debts article.
What is your savings rate?
The savings rate is the amount of money you save for each month of your total or gross income. The more money you are saving each month, the more you can accumulate towards retirement, a down payment, your emergency fund, or any other financial goals you might have. Ultimately, your goal is to save for a retirement fund. It’s never too early to start contributing to your retirement account. You can also consult a financial planner to help maximise your savings if you don’t know where to start.
To calculate your savings rate:
Monthly savings amount ÷ Monthly gross income = Savings rate
Do you still need to calculate this even when you’ve set aside an amount every month? Why, yes! While the savings rate may differ according to your age, a good general rule of thumb to follow is to save at least 15 percent of your income each year. However, it’s advisable for groups in their 20s and 30s to aim to save 25 percent of the overall income yearly. With this formula, you now know where you stand, and how much to save in the future.
What is your credit score?
Checking your credit score is a good indicator in determining your financial health. A credit score is a 3-digit number that represents your creditworthiness. It evaluates how responsible you are in repaying your debts based on your credit history. The ideal credit score ranges from 697 to 850. Hence, the higher your score, the better chance you’ll have of securing a loan. While a low credit score shows that you may not be qualified to handle debts due to unsettled debts, payment delinquencies and more.
Is your income growing?
Your financial commitments grow as you age. Ideally, so should your income’s growth. Take a step back to calculate how much has your income changed or grown. A good indicator of your financial health, this can be determined by relooking at your financial monthly income. Your earnings or income shouldn’t be the same as your first job and it should be able to cover not only your monthly expenses but enough for you to put aside for savings.
How real has this money-talk been for you? It’s a hard topic, but it’s definitely important for you to do a financial health check for your future. Now, you’ll know your next move to better your financial needs.
This article is for informational purposes only and CIMB does not make any representation and warranty as to the accuracy, completeness and fairness of any information contained in this article. As this article is general in nature, it is not intended to address the circumstances of any particular individual or entity. You are advised to consult a financial advisor or investment professional before making any decisions based on the information contained in this article. CIMB assumes no liability for any consequences arising from your reliance on the information presented here.