Assessing Your Financial Fitness

This course covers the process of financial planning. Learn how to identify your immediate and long term financial goals. Know what resources you have to meet and achieve your goals.

Financial Planning is a process for you to take charge and manage your finances to ensure your financial well-being. It comprises of Managing cash-flow for your current needs and future goals, e.g. buying a home; Managing exposure to unforeseen circumstances by providing for your dependants’ basic needs; Managing resources to meet your financial goals, e.g. child education and retirement.

Just like a physical health medical test, a financial fitness assessment allows you to have a better understanding of your financial health. The following are common personal financial problems that can affect your financial fitness: Failing to plan ahead, or not planning at all; Not spending within your means; Spending on borrowed money, buying with consumer credit; Delayed savings for retirement; Falling prey to financial sales pitches; Not doing your homework; Making impulsive decisions; Exposing yourself to high financial risk.

In order to accurately access our financial situation, we need to find out the following: Net Cash Flow Position; Net Worth; Financial Ratios. The net cash flow position is the amount after the total outflows have been subtracted from the total inflows. The net cash flow statement gives you your net cash flow position, and can be used as a tool to find out if you are making good use of your income. Your net worth is a snapshot of your financial position at a specific point in time.

In the event of a total loss of income, you may have to use your liquid assets to cover your regular expenses. The Basic Liquidity ratio shows the number of months you can expect your liquid assets to sustain your monthly expenses. This is also known as your emergency savings. The Savings Ratio reveals how well you are building up your savings for your future consumption. The Non-Mortgage Debt Service Ratio compares the monthly payments to service all debt, excluding the mortgage, with a person’s monthly take home pay. This ratio simply provides insight into what amount of income is going towards non-mortgage debt. The Mortgage Servicing Ratio reveals the percentage of your monthly income that can be used to service your monthly property loan instalment.

This course continues from "Making Sense Of Your Money". Also, after going through this course, you can join the next module entitled "Implementing Your Financial Plan".