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Are you Financially Healthy? - Outside View by PersonalFN

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Are you Financially Healthy?
Feb 24, 2014

All of us want to live a healthy life, so we go to our doctors for regular check-ups. But do you regularly visit a Financial Doctor as well?

While many of you may be surprised at this question, let us apprise you that like you undergo a health check, it is imperative to have a "Financial Health Check-up" as well, if you desire that your personal finances remain in the pink too. You see, many often forget that financial health is also as important as our physical well-being. Hence recognising this, at PersonalFN we developed a new Financial Health Check-Up Calculator for you, incorporating some valuable feedback and suggestions we got over the years. But before you jump and use the same to check your Financial Health, we would like to guide you what it's all about and how it can help you.

It is noteworthy that, your financial health is based upon many factors, so let's discuss all of them, one by one in detail:

  • Current Age Your current age determines your time horizon for your financial goals. Longer your time horizon, higher is your chance that you will achieve your financial goals. But do remember; as your age increases, your time horizon decreases and thus the possibility of falling short of your targeted amount for your financial goal also increases.

  • Source of Income Your source of income determines your risk taking capability and willingness to take risk. Salaried people generally have limited surplus and are willing to take lower risk as against a person engaging in a business activity and doing very well, and is therefore willing to take risk supported by higher risk taking ability.

  • Financial Dependency Your financial health is also a factor of the number of people dependent upon you. When you are young and you have none dependent on you; and thus you can take higher risks. But as your age increases, you get married and some members of your family become financially dependent upon you, and it decreases your risk taking capability.

  • Life Insurance As you may be aware, a life insurance policy protects the financial future of your family in case something happens to you. So you need to have an optimal life insurance cover indemnifying risk. You see, it is generally required to cover your existing liabilities, and ensure that if some members of your family are financially dependent upon you, they are well safeguarded.

  • Medical Insurance The rising cost of medical treatment has made it rather essential for each individual to have a sufficient health insurance cover; Medical insurance as you may be aware, reimburses your hospitalization bills in case of hospitalization due to any accident or any illness. So it is must for everyone to have their own medical insurance cover; which can either be taken as an individual policy or in a family floater form. And mind you, buying a health policy insurance policy is more than just signing on a dotted line. You need to carefully read certain important conditions enunciated in health insurance policy while you are opting for one.

  • Contingency Reserve In today's world of uncertainties, you need to be prepared well in advance to face it. So you should always maintain contingency reserve anywhere between 6-24 months of your monthly expenses. This can be done by deploying money in a separate bank account or liquid fund.

  • Current Loans / Liabilities Your current loans impact your financial well-being in a big way. This is because higher are your liabilities, lower will be your risk taking capability. So, you should always try to maintain your Equated Monthly Instalment (EMI) within 40% of your monthly salary.

  • Current Savings It is vital to keep a track of your expenses and ensure that you are saving enough to meet your financial goals. Savings are essential to have enough funds when you really need them. In other words, savings are the means to meet your financial goals.

  • Current Investments Financial health is not only dependent upon how much you save but also depends upon what kind of investment you have done till now. If you have invested in the right financial products then you could be financially healthy; but if not then, you are in serious trouble.

  • Purpose of Investments Very often, apart from wealth creation the purpose of investment is not defined by many. We all have financial goals such as buying a dream home, a car, a vacation abroad, children's education, their marriage and our own retirement amongst host of other financial goals. And defining these in our view is imperative for prudent investing (along with a requisite asset allocation thereto) rather merely putting our hard earned money to work in the endeavour to create wealth.
You see, all the above mentioned points are interlinked and needs to be answered properly and honestly to determine your true financial health. Regularly monitoring your finances can do well to your long-term financial well-being.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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