Why Is Financial Health Important? How To Calculate It?

Why is financial health important- man holding bag of money

Financial health?

Check-up?

Yes, you read that right.

Your financial health is as significant as your physical and mental well-being.

When was the last time you went to a doctor? I am sure the answer will be not more than a year back.

Let me ask another question: When was the last time you checked your financial health? Never, is it?

Don’t worry; you can always get a head start on your financial wellbeing as ‘it’s never too late’.

Conducting a financial health check-up can prove to be beneficial in giving you a comprehensive idea about your current financial status. It can enable you to figure out what modifications you have to make in your budget plans in order to achieve a greater financial stability.

We deal with our bodies, as we should, by heading off to a doctor. Through this procedure, we’re surveying our wellbeing. We should, in a similar manner, deal with our finances and savings.

If you are willing to check your financial wellbeing and looking for suitable techniques to do the same, you’ve come to the right place.

We at Bachat have shared numerous tips that will help you in evaluating your monetary position.

Evaluate Your Net Worth

Why is financial health important- man holding bag of money

The initial phase in surveying your financial wellbeing is discovering what your total net worth is.

Net worth is a typical method that compares what you have right now and how much do you owe right now, without factoring in your income.

It’s determined by essentially taking the estimation of your assets (i.e. what you own) and subtracting your liabilities (i.e. what you owe).

Record everything that you believe is of value (i.e., money, properties, your home) and subtract all that you have as an obligation (i.e., education loan, credit card advances etc.) and voila you have arrived at your net worth!

Easy, wasn’t it?

Your income doesn’t factor into this condition by any means—it’s only a measure on what you have right now versus what you owe.

The reason net worth is a very practical approach to judging your financial situation is that it enables you to make a valid comparison.

I don’t prescribe comparing yourself with other individuals but instead compare with you. Along these lines you can perceive how your net worth is performing.

For instance, you have assets worth Rs.4,00,000 /- and you owe Rs.1,60,000 /-, then your net worth equals to Rs.2,40,000 /-

It’s alright if you have a negative net worth. The point behind calculating your net worth is to keep a track of its progress all the time.

Your net worth is just an individual gauge on how well you’re doing with your cash. Indeed, higher net worth is better; however you truly shouldn’t gauge yourself against any other person.

Everybody’s conditions are unique and so is their net worth.

Instead of comparing, concentrate on expanding your net worth around 5-7 percent every year as a medicine to your financial health.

Ascertain your debt-to-income ratio

Ratio 16:9

After you’ve made an assessment of your net worth, it’s an ideal time to investigate your debt-to-income ratio.

This financial measure takes into account your income as well, unlike net worth.

Your debt-to-income ratio is determined by taking the aggregate sum you owe and dividing it by your monthly income.

So for instance, suppose your month to month net salary (before taxes) is Rs.70,000/-, and you have the following debts to take care of:

  • Home loan — Rs. 10, 000/-
  • Vehicle — Rs. 2,000/-
  • Education expenses — Rs. 10,000/-
  • Credit card — Rs. 500 /-

So your complete monthly debts are Rs. 22,500 /- every month. Divide that by your monthly income of Rs. 70,000/- and you have a debt-to-income ratio of 32 percent. (Rs. 22,500/Rs. 70,000 = 0.32).

Experts believe that an ideal debt-to-income ratio should be of 30% or lower.

Your debt-to-income ratio is significant for a few reasons. Initially, it’ll give you a decent feeling of whether your obligation is levelled out.

In case you’re moving toward a ratio of 40-50 percent, it should be considered a warning signal for you to lower your debt obligations.

Second, your debt-to-income ratio is an essential factor in your financial assessment and in getting new credit. On the off chance that you have a high proportion, many home loan banks won’t work with you until you lower your debt.

While experts tend to believe an ideal debt-to-income ratio to be 30 percent, I would suggest you level your debt down to well under 20 percent.

A convenient solution for this may appear to expand your income somehow. While that is valid, my recommendation is to deal with lowering your debt as forcefully as you can to get it underneath that 20 percent bracket.

This is a significant measurement to quantify your financial health.

For more in depth guides:

27 Actionable Personal Finance Tips For Young Indians

4 Principles of Personal Finance in India

Assess your Housing Situation

Why is financial health important - House vs cash

As we attempt to reach unreasonable ‘celebrity’ standards of living, we’re getting into an ever increasing number of costly homes that we can’t manage.

To evade a renting/housing emergency, you must figure out how to get your rent under control. This is another key calculation in assessing your financial health.

One of the first steps in determining the portion of salary you spend on rent is determining how much maximum rent you can actually bear; given you earn a fixed salary.

This can be achieved by finding a fixed salary-to-rent proportion.

If you are unable to come up with an ideal percentage of rent, designating 30 percent of your pay towards rent is a decent spot to begin. Experts believe that individuals who spend in excess of 30 percent on everyday costs are “cost troubled”.  

When ascertaining your salary to-rent proportion, remember that you ought to count the entire income of all the people who’ll be sharing the rent with you.

On the off chance that you live with a flat mate or friend, make sure you factor in their salary as well to guarantee an accurate calculation of the salary-to-rent proportion.  

However, there is no fixed universal rule of finance for everybody. The 30% salary-to-rent proportion may not fit everybody. For instance, it may not work with those who have below-average salary levels.

These people will have to appoint more funds towards rent in order to meet it. Likewise, there is sometimes such a high earning level where allotting 30% of one’s salary to rent will make no sense.

Hence, a lower rent proportion will have to be fixed in such cases.  

If you find out after this analysis that you’re paying way more than you should, I would suggest relocating to a cheaper house.

However, if you adore where you live and are unwilling to move, another solution could be to get a flat mate so your living costs can get divided.

For further reading, check out: How Much Should You Spend On Rent Per Month?

Discover Where Your Cash Is Going (and in case you’re spending more than you should)

discover where you cash is going

Imagine a scenario. You open your wallet to pay cash to the taxi driver and realize you only have a Rs.200 note left when you just put cash in your wallet two days back.

Sounds familiar? Then read on.

Money saving is something we all wish to do. But, we all know it’s easier said than done.

Planning how to cover your monthly expenditures and keeping a track of where your money goes is the key to Personal Financial Planning.

Therefore, it is essential that you stick to a plan. I strongly recommend utilizing the 50/20/30 guideline for your spending-planning.

The 50/20/30 rule offers a fundamental budgetary system for your spending and sparing. The standard says that you ought to burn through half of your pay on your everyday costs.

According to this guideline, you should invest 20% of your salary in investment funds and make provisions for savings. You can utilize the rest 30% for recreational activities without worrying about a cash crunch.

Since the 50/20/30 standard is just a guideline, there is some adaptability.

You can change the specific portions dependent on your individual circumstances and preferences.

The fundamental thought is to confine your everyday costs to generally half of your pay. That way, you’ll have enough remaining for your savings and recreation.

An app like Bachat can help you plan your finances and keep aside a fixed proportion of your salary for savings every month.

Apart from savings, ensure that your investments align with your income and expenditures.

Wait, investments?

Yes, investments. If you’re not already investing, start today. Better yet, start now.

One life-changing financial tip is to simply invest money into stocks, bonds and mutual funds and let the magic of compounding do its work. It doesn’t matter how less you save, what matters is that you save.

In other words, to make your money grow, you need to make it work for you. And the easiest way to do so is by investing it. By investing even Rs.1,000/- per month, you can get wonderful results by the time you retire.

It doesn’t matter what your age is, you will end up saving tons of money if you start right now.

You pay taxes to the government. You pay rent and you pay your bills.

But are you paying for your future self?

If you want to start saving, start paying yourself first. It’s one of the most important among the 4 Principles of Personal Finance in India

Sort your priorities and take out a portion of your income every month for investment you’ll be golden!

But wait, before you start investing, you must think about your risk appetite.

In case you’re young, your risk appetite is going to be high.

Very high.

The reason behind this is that you have a ‘magic asset’.

Time.

Therefore, I would suggest you invest your money into aggressive options which offer high returns.

Set Financial Goals

At last, set completely clear financial goals for yourself and your family.

The reason behind this seemingly unimportant exercise is quite important.

If you don’t have any financial goal or objective to achieve at the end of the day, you won’t be able to work for it. In other words, how can you work for something if you don’t even know what you’re working for?

Hence, building up clear financial objectives and goals is the first and most significant thing you ought to do when you’re completing a money-related checkup.

These objectives will enable you to understand what changes you must undertake in order to achieve your own financial goals.  

To increase your goal-achievement rate, you can consider setting both short-term and long-term goals and record them. Short-term goals can range from a week, a month up to a year.

Long-term goals can range anywhere between a year to five years.

Why Is Financial Health Important? Summary

In conclusion, these are only a few “treatments” that you can undertake for your financial health. So become a ‘doctor’ today and rejuvenate your financial health!

Why is financial health important?

Your financial health is as significant as your physical and mental well-being. Conducting a financial health check-up can prove to be beneficial in giving you a comprehensive idea about your current financial status. It can enable you to figure out what modifications you have to make in your budget plans in order to achieve a greater financial stability.

What is debt-income ratio and why is it important?

Your debt-to-income ratio is determined by taking the aggregate sum you owe and dividing it by your monthly income. Experts believe that an ideal debt-to-income ratio should be of 30% or lower.
Your debt-to-income ratio is significant for a few reasons. Initially, it’ll give you a decent feeling of whether your obligation is levelled out.

How and why should I evaluate my net worth?

Net worth is a typical method that compares what you have right now and how much do you owe right now, without factoring in your income. It’s determined by essentially taking the estimation of your assets (i.e. what you own) and subtracting your liabilities (i.e. what you owe). The reason net worth is a very practical approach to judging your financial situation is that it enables you to make a valid comparison. I don’t prescribe comparing yourself with other individuals but instead compare with you. Along these lines you can perceive how your net worth is performing.


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