When you need or want to get better with money, it’s common to not know where to start. At first, you’re exploring a new subject and getting exposed to financial concepts which can make you feel overwhelmed and confused. Add to it the endless amounts of information and general advice that’s found on the internet and you may get left scratching your head while trying to decide what you should do first!
However, taking a financial assessment can help you understand where you should begin. Not only that, but it can point out some simple money moves that you can implement today. By taking action, you’ll be on the journey towards creating wealth and making your dreams your reality!
When starting, everyone’s financial situation is different. Some people may be deep in debt and feel financially insecure while others may have already begun digging themselves out. Aside from that, everyone also has their own goals and dreams. So, the steps that someone else is taking might not be relevant or even appropriate for you!
A financial assessment gives the details of your current financial situation. After completing one, you’ll realize how you’ve been using or potentially abusing money. With this information, you can begin taking steps to improve your financial wellbeing by creating wealth!
Also, by the end of this financial assessment, you’ll be able to identify your money personality and mindset. Not just that, but you’ll discover some potential challenges and ways you can overcome them, too!
According to a recent CNBC article, only 39% of Americans could pay for a $1,000 emergency expense in cash. The rest would have to borrow money or find another place where they could get some fast cash. Either way, they’d get charged enormous interest rates which would make it harder for them to start progressing forward!
Emergency expenses are bound to happen. When they do, you probably won’t enjoy paying for them with debt and then wasting money on interest. But with liquidity, you’d have the cash to pay for them outright, allowing you to forge ahead without getting slowed down by large interest payments!
The first step in the financial assessment is to determine your liquidity. It shows how well you can handle unexpected expenses based on the money you have available in checking, savings, and other cash accounts.
The liquidity ratio displays your margin of safety for when unforeseeable financial events occur. It’s calculated by dividing your liquid assets by your monthly spending and determines the amount of time you could survive on your cash alone.
The liquidity ratio formula is:
Initially, you should aim to have a liquidity ratio of at least 3. However, if your job is highly specialized or you fear losing it, then you may want to prioritize making your liquidity ratio even higher!
One way to help you stay liquid is by using rainy day funds and emergency savings accounts. Not only will they help you prepare for the unexpected, but they’ll also keep these funds separate so that they don’t accidentally get spent!
According to a study conducted by Mint, 65% of Americans don’t know how much money they spent last month. Having said that, do you?
Since most people don’t manage their money, they have no idea where it’s getting spent. Most likely, they’re spending emotionally and impulsively buying which causes them to live beyond their means!
However, with a budget, you can create a plan for how your income will get spent. It allocates money to your most important needs and wants, but doesn’t allow you to go overboard. This way, you’ll have a spending plan that also allows you to save!
The next step in the financial assessment is to review your income and spending. To start, write down your sources of income and all the places where it’s getting spent. Next, put each expense into a budget category and add each one up. Then, calculate your total spending and subtract it from your income.
If the resulting number is negative, then you’re spending more money than you earn. Due to this, you’re not only going into debt but your future income has already been spent on purchases that you made in the past!
On the other hand, if your income is larger than your expenses, then you’re saving money. No matter how big or how small the amount, you’re putting money aside to secure your financial future!
One metric that’s useful in personal finance is your burn rate. It’s the percentage of your income that’s getting spent every month. Alternatively, it’s also the amount of money you must make to be able to pay all your bills.
When starting, shoot for a burn rate of 90% or lower. To achieve this, you may need to prioritize your spending and be more frugal with money, so that you can save.
One of the most helpful financial tools you have is your budget. Not only does it provide you with a financial strategy for spending money, but more importantly one that allows you to save it!
Saving money is the foundation for building wealth. Without it, you couldn’t pay down debt, build a cash runway, or have the means to pursue your dreams!
The percentage of your income that’s getting saved each month is measured by your savings ratio. The higher it is, the more you have to put towards your goals which makes it more likely that you’ll achieve them early, too!
Starting, target a savings ratio of at least 10%. At this rate, you’ll be living below your means and building financial discipline. This way, as your income grows, you’ll have better control of it and can direct it towards your goals!
While saving money is important, doing it alone won’t help you become rich or wealthy. To beat inflation and make your money grow, you must invest and earn a real rate of return!
The second to last step in the financial assessment is to calculate your net worth. It’s a measurement of your financial health based on a moment in time.
To calculate your net worth, list out all your assets and liabilities. After totaling each one, subtract your liabilities from your assets. If the result is negative, then you have more liabilities than assets which likely means you’re handcuffed to your job. Whereas a positive number means you’ve already started saving for your future!
Besides calculating your net worth, you should also track it over time. In doing so, you’ll see it grow larger which can help you stay motivated and on track in your pursuit of financial freedom!
By completing this financial assessment, your circumstances have become clear. Along the way, you likely discovered some shortfalls or improvements that would strengthen your position, too.
Regardless of what they may be, setting SMART financial goals can help you achieve them. Not only will they iron out the specifics, but they can also help establish key milestones to monitor your progress along the way!
No matter what your next step may be, clearly defined goals will help you. Once they’ve been set, all that’s left is for you to begin!
While it’s helpful to fill out a financial assessment before you start, it’s also useful to complete one regularly as well. By doing so, you’ll find new weaknesses in your strategy which also provide you with new opportunities to grow and develop!
Do you have questions or need help with your financial assessment? CLICK HERE to schedule a free call, I’m happy to help!
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