Broker Check

Diagnosing Your Financial Condition

| January 05, 2018
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How healthy are you financially? To come up with a diagnosis, grab a notebook or turn on your computer and conduct a comprehensive financial assessment. 

Start with a breakdown of your net worth. On separate lines, list your assets. Determine liquid assets first, such as cash and savings. Then, add up the cash value of illiquid assets: retirement plans, real estate, collectibles, other personal property, life insurance, and annuities. 

Here are two signs of healthy finances: 1) your liquid assets could cover three to six months of living expenses, in case of emergency, and 2) at least half your assets are appreciating in value. 

Once you’ve determined your assets, add up your liabilities—unpaid bills and outstanding loans—and do the math. After totaling your assets, subtract your liabilities to determine your net worth. If the total value of your outstanding debts (including your mortgage) is less than half of your assets, you’re in good shape. If your debts are more than half your assets, you may be carrying too much debt. 

Now, examine your cash flow. Pull out last year’s tax information and a clean sheet of paper (or open a new file on your computer). Write down your after-tax income (annual income minus taxes) on the top line. Then take out your checkbook, credit card statements, and other records. Now, determine the amount you spend in the following areas: rent or mortgage and utilities, food and clothing, furniture and appliances, leisure activities, car payments and expenses, professional expenses, and insurance premiums. Write each on a separate line and add lines for special expenses (such as a vacation, education, etc.), or simply add lines labeled “other.” 

After you add those lines together, subtract that sum from your after-tax income to determine the money available for savings and investment. If this figure is less than what you actually have available, you may have to go back and check your figures. People often underestimate their spending. 

If the cash flow worksheet shows that you’re saving 5% to 10% of your income, you’re doing well. If not, you may want to cut back on your spending and develop a plan to pay off your debt. The worksheet may also reveal areas where you can cut back without making a dramatic impact on your lifestyle. 

Determining your net worth and analyzing your cash flow may help you gain a realistic diagnosis of your financial condition, along with ways to work toward a healthier financial prognosis.

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