Calculate Your Net Worth
So you want to get your act together. You want your wallet to stop pretending to be a bag of potato chips in disguise (full of air and little else). First off, you’ve got to know where you stand. If you want to get to where you want to go, first you got to know where you are.
Start by asking yourself what is your net worth? Net worth is the amount by which your assets exceed your liabilities. How much you own versus how much you owe. It’s one of the most important gauges of financial health, so get out a pen and a paper and start writing!
You should recalculate your net worth regularly – once a year is a good start – So that you can identify trends in your financial health and keep track of your progress towards financial goals. It will also allow you to take control of debt problems before they get out of hand.
Set Specific Savings Goal
Okay, so you’ve calculated your net worth. Now think about what you want. Is it a car? A house? A university education for your kids? Life is all about moving forward, and you can’t do that effectively if you don’t know where you’re going. Just wanting to ‘save more’ isn’t a good resolution, because such a vague goal is difficult to keep track of and follow up on. Set a clear, measurable goal and work towards it.
For example, if your long-term goal is to buy a house, put in the necessary legwork to make it a reality. Research about property prices, determine how much down-payment you’ll be required to fork out, and monthly payments after that. Compare the home loans offered by various banks and find the one best suits your needs, using Loanstreet’s free loan comparison tool. Find out how much you need to earn to comfortably take out such loans without falling into debt.
Create An Emergency Fund
Life isn’t all sunshine and daisies, and you never know when disaster might strike. The job market isn’t particularly rosy these days, and who knows when unexpected expenses like car or home repairs may strike? As a rule of thumb, people should be able to survive for as long as 9 months without any income. Alternatively, think of the worst possible scenario that could befall you or your family. Estimate how much would be required to survive it, and add a 20% margin for error to it. This is the amount you should aim to save for your emergency fund.
It’s also important to note that your emergency fund should consist of highly liquid assets that are as risk free as possible. One helpful tip when creating emergency funds is to separate the funds into two accounts – one for small emergency expenditures like repair costs for your car or home, and one for large emergency expenditures like job loss or serious illness.
Pay Off Your Debts
No one wants to be saddled with debt. So do this simple exercise: list down all your debts, from the ones charging the highest interest rates to the ones charging the lowest. Done? Now you know what you owe and to whom. Focus on clearing the debts with the highest interest rates first, because those are the ones that will take the largest bite out of your wealth in the long term. Of course, it goes without saying that you should make the minimum payments for the rest of your debts at the same time – nobody ever got debt-free by ignoring half of their creditors. Once you’ve cleared the highest item on the list, focus on the next one and work your way down the list – you’ll have your debts under control before you know it!
Review Your Life Insurance and Disability Insurance Needs
Unexpected medical expenses are one of the leading causes of bankruptcy. Make sure that you’re insured against unexpected catastrophes so that you don’t become just another number in that unpleasant statistic!
As you progress through your career, your life and disability insurance needs change. Consider how much you need versus how much you have at the moment through your employer’s benefit package. Use this information to determine whether you need more or less life insurance. Does term life insurance or permanent life insurance suit your situation more? Does your disability insurance cover enough? These are the questions you must answer if you are to properly and efficiently protect yourself against unwanted disasters.
The key to attaining your life goals and maintaining a healthy financial status lies in good personal financial planning. The onus is on you to handle your finances wisely, but if you’re uncertain where to start, we hope that you’ll take the Loanstreet Personal Finance Challenge this year as your first step towards financial independence!