Know your financial health

November 6, 2013 by Usiere Uko

   

 

The author of ‘Practical Steps to Financial Freedom and Independence,’ Usiere Uko, writes on the need to undergo a financial fitness test

My wife asked me a few days back about my renewed vigour towards daily exercise. I had just completed a health evaluation and the overall result was poorer than I expected. I had migrated from overweight to obese with a middle age spread to go with it. I had a choice to make, shape up or face the consequences.

Aside from medical checkups, you need a financial check-up to determine your financial health. Where are you financially? How much cash do you have? What is the size of your asset portfolio? How much do you owe? If you are to put your belongings on a yard sale, how much would you realise? What is your net worth? Does your current financial habit move you forward financially or you are on a highway to nowhere?

Before you give in to the yuletide spending spree, it may be a good idea to check your financial foundation so that you don’t usher in January with regrets and buyer’s remorse, especially when school fees stare you in the face.

Financial spring cleaning

For most people, getting the data together to determine our financial health will require rearranging the whole house, going through everything to be able to gather what is needed. Our stuff is all over the place. Looking at cash, you find cash all over the house in unlikely places, ranging from trousers and shirt pockets in the closet and laundry, under the cushions, in envelopes around the house, car etc. Most people carry out a massive manhunt for cash when they are broke, shaking out their trousers pockets and combing through the whole house.

You need to gather all your cash, bank statements, bills, property documents/titles, dividend warrants etc in one place. By going through the house top to bottom, you will likely catch everything, and may be surprised what you find. Some of your accounts may have gone dormant with money in it. Some banks may charge you account maintenance fees, depleting your balance even in its dormant state. You will find dividend warrants you never bothered to pay in. You will find cash in unlikely places. You will also find bills that have fallen through the cracks, shares you own but have long forgotten about etc.

One useful outcome of this exercise is that it will give rise to a key action item – putting a system in place to store and process your financial affairs. You may need to visit your bank to reactivate or close some accounts, pay in your dividend warrants, your registrar to update your details and process dividend warrants that have expired, your broker to sell your shares or rebuild your portfolio, the lands registry to perfect your property titles etc.

Your net worth

Gather this information and separate them into what you own and what you owe. Carry out a quick inventory of your other belongings and assign a value. This is where you need to remove the rose tinted glasses and face reality. Your stuff is not worth as much as you think. For example, you may feel that you can get N150,000 for that wide screen TV you shelled out N250,000 for without blinking two years ago. You may be surprised that you may not get up to N50,000 for it in a yard sale. People generally price down used items. One rule of thumb is to assume 10 per cent of the price you paid for it. This is the key disadvantage of spending your hard earned money on liabilities, especially the high end variety. It depreciates rapidly and your money does not come back (since it is not generating income).

When you are done with coming up with the current value of your stuff, sum what you own and what you owe. Your net worth is the difference between the two.

Net worth = what you own – what you owe

This gives you a fair idea of your financial position and one of your financial goals is to raise this figure by acquiring assets.

Your net worth does not give you a true picture of your financial health, as liabilities also fall into items you own. If what you own does not put money in your pocket, you may own so much and still be broke. The quality of what you own matters a lot. Your cash flow from passive income is a better indicator of your financial health than the worth of your stuff. ‘Big’ companies have been acquired by ‘smaller’ companies because they owned so much stuff but so little cash. He who has the gold makes the rules as the saying goes.

One useful outcome of knowing your net worth is being able to know what you have been doing with your money all these years. If you earned N20m in the past 10 years and your net worth is N2m, then N18m is gone with the wind. If the N2m still standing is made up of liabilities, it means that too will soon be history. You need a massive wake up call. You are about to have a financial ‘stroke.’ You need to change your money habits if you do not want to end up in the poor house.

Your financial health fitness test

In addition to knowing your net worth, you need to go through a financial fitness questionnaire. This tells you at a high level the state of your financial health. There are many versions available which you can find online, and can also get from some financial advisers. There is one in my book – ‘Practical Steps to Financial Freedom and Independence’ – which also incorporates some elements of financial intelligence. These tests are simply a series of questions on your financial habits requiring a ‘yes’ or ‘no’ answer and should not take up to 30 minutes to complete.

After the test, simply collate your scores and then go through the analysis of the scores to see where you fall, based on the number of questions you answered ‘yes’ to. Your ultimate aim is to be able to answer ‘yes’ to all the questions.

Ignorance is not bliss

What you don’t know can hurt you badly. Ignorance is not bliss. We live in an era of rapid change. If you do not upgrade yourself, you may become part of the debris left behind by change. The person who does not read is not better than the one who cannot read. We are in the information age. Lack of information is no longer an excuse.

Stroke and heart attack do not fall from the sky. They can be picked up by regular health checks long before they become a problem. Most finances are distressed and the owners have no clue, until an event like a possible job loss looms and panic sets in to expose a sick financial foundation.

If you have not gone for a financial health check-up, today is a good time to decide to do one. It is not rocket science. Schedule one and make it happen. Your health and finances are too important to leave to chance and circumstances. As I put on my running shoes one more time, it may be time for you to bring out your gloves, mop and bucket and prepare to commence your financial spring cleaning before the New Year Resolution crowd shows up.