Money does matter and therefore it becomes important to know your financial health. In this article we present, how to analyze your financial health. The first you can begin with is analysis of your expenses.
Analysis of expenses
The analysis of your expenses is the first step towards understanding your financial health. Analysis of expenses conveys our savings rate which is governed by our spending habits. It’s important to save more and spend less to strengthen your financial stand. When you indulge into regular savings habit then you are able to lead a secured financial life even in the case of fixed sources of income.
An easy way to analyze your expenses is to categorize them as committed & non-committed expenses. Examples of committed expenses are grocery expenses, medicinal expenses, education fees & EMI payments which are mandatory. Examples of non-committed expenses include dine out expenses, expenses incurred for leisure & vacation which are non-mandatory. You should lower the rate of expenses for non-committed spending to improve your savings rate. Further let’s learn more about committed and non-committed expenses.
Committed expenses vs. non-committed expenses
Debt management plays a vital role in terms of committed expenses. Measures such as shutting down on high interest rates, loans which are non-productive or refinancing measures greatly help to improve the savings rate.
Insurance in reality is a committed expense. However, some people consider it to be a long term savings option which is false. It’s important to analyze your insurance requirements carefully to prevent yourself from being over insured or under insured. You should select an insurance policy after carefully evaluating all the possible options as per your requirements with the help of a professional. This will help you to select appropriate insurance options. The premiums paid for sub-optimal insurance policies impact directly on the savings rate of a person. Therefore, prudent decisions must be made in term of insurance policies. Similarly prudent decisions must be made with respect to the purchase of medical insurance policies. Non-committed expenses on the other hand can be greatly reduced to strengthen your financial health. Further you will learn about the importance of analysis of your net worth.
Analysis of net worth
Analysis of net worth helps to analyze your debt management skills’ efficiency. When you analyze your net worth, you will realize whether the money you have channeled towards achieving your financial goals are met with regular & efficient investments. You should separate liquid assets & illiquid assets collected over the years & take appropriate decisions. Further you can get browse through more information about liquid assets vs. illiquid assets.
Liquid assets vs. illiquid assets
Liquid assets are those which can be easily converted to cash. Illiquid assets are those which usually require more time & effort to get converted to cash like real estate. It’s necessary to maintain a good ratio of liquid to illiquid assets. With this it also becomes important to maintain significant cash reserves.
Diversification of investments helps to increase the value of your investments. You should not let your cash to stay at rest in your bank & it should be more than your funds for emergency. When you analyze your existing assets, it reveals its state of being liquid or illiquid. Also it reveals how finely diversified are your investments to compare it with the outstanding liabilities. This enables you to take appropriate decisions on proper allocation of funds to overcome the outstanding liabilities at any circumstances.
Conducting regular checks on your financial health will help you to clearly understand your current financial status. This provokes you to take appropriate measures so that your life is financially secured even in case of unanticipated events. It also helps you to correct & not repeat the past financial mistakes.