Having awareness of where you currently stand financially is critical. Unless you know where you are you cannot know where you are going or which direction to go in that case. Knowing your current financial situation gives you your total financial picture. It maps your exact location. It is really important to assess your financial situation because that way you can learn how to make improvements and which improvements to make where. Through this we will also be able to identify what adjustments to make in our lives to ensure we better our financial health. Yes, financial health because of financial situation is just like our financial health. So how do we go about determining our current financial situation?
1. Determine your net worth
The first step to determine your current financial situation is to know your net worth. Your net worth is the total of all your assets (everything you own from your cash to your investment) less your liabilities. If you still don’t understand how to go about calculating your net worth, let me take you through some simple math. So take a pen and paper ;
- Write down everything you own; cash, investment, your home. Just make sure you list everything. These are your assets.
- Now write down everything you have as debt from student loans, mortgage to credit cards. These are your liabilities
- Now take your calculator and subtract your liabilities from your assets.
NET WORTH = ASSETS – LIABILITIES
The amount you remain with is your net worth. The value can either be positive or negative it depends on where you currently are. Though if your value is a negative there is reason to be concerned but don’t panic yet. At least you know where you are. Now look for a plan to get out of there.
Your net worth can also prove important in reflecting the performance of your investment.
2. Know your debt situation
After calculating your net worth you need to determine your current debt situation. You need to ask yourself did your debt levels increase or decrease? This will tell you whether your debt situation is under control or not. To have a clear picture of your current debt situation, you need to calculate your debt to income ratio. You must be asking yourself how? Again take your pen and paper; Take the total amount you spend on debt payment and divide it by your total gross income. The value you get you should multiply it by 100 to get your value as a percentage. The reason of getting your value as a percentage is to know whether it is high or low.
EXAMPLE; Let’s say the total amount I spend on debt payment is 200$ and my gross income is 1000$. My debt to income ratio will be; ( (200÷ 1000) which is equal to 0.2. Now to find my ratio as a percentage I multiply 0.02 ×100. Which will bring my value to 20%.
A higher percentage of your debt to income ratio say above 50% shows that you are spending more money on debt payment therefore you need to reduce your debts whereas a smaller debt to income say below 20% ratio shows you are spending less cash on debt payment. Always aim at making your percentage as low as possible.
3. Know where your money is going
An important step in determining where you currently stand financially is also knowing where your money is going. What are you spending your money on? If you already know where your money is going you need to ask yourself whether you overspending or not. If you don’t know where your money is going then I will advice you to create a budget and stick to it. Try not to spend more than you have allocated each and every item. Budgetting will help you account for each and every penny and hence you will know where your money is going. While creating your budget you also need to evaluate your housing situation because a huge chunk of our paychecks goes to our housing. Ask yourself whether you are in a house you can afford or not? Like for me living in a house where I spend above 40% of my budget is living in a house I cannot afford. How about you? Just make sure you live within your range.
4. Check if you are on track with your retirement plan
Another thing that will help you know where you are currently on matters finance is asking yourself whether you are on track towards the retirement plan you set out to achieve or not. If you don’t have one you need to make a point of having one. If you already have one and you are convinced you are on track then kudos your current situation is fine so look for ways to better it but if you feel you are off track get a way to get back on track.