It’s critical to know where you stand financially since your finances can either make or break you. Financial advisors always advise that one should understand their current financial situation, set financial goals, have a budget that they stick to, make retirement savings, and pay off debts if they intend to stay at the top of their financial life.
With all these in mind, here are four easy steps that will help you review your finances.
Determine Your Net Worth
First, you will have to assess the status of your financial health by determining your net worth. You can establish your net worth by subtracting your liabilities from the value of your assets. You can use applications or manually note down everything you own that you consider to be an asset then deduct all the debts; that is mortgages, credit card debt, student loans, among other loans.
Keep in mind that your income shouldn’t factor in the calculation and that it is meant to gauge what you have compared to what you owe. Most people have a negative net worth, but this shouldn’t worry you since the idea is to keep track of your investments.
The net worth calculation is a factor that you use in measuring how effective you are in handling money. Having a good record would be ideal, but you shouldn’t compare yourself with others since you don’t know their financial situation. Make it your ambition to increase your net worth by 8% every year through asset accumulation and debt repayment.
Evaluate your Debt to Income Ratio
Once you are done with calculating your net worth, you will need to analyze your income. The debt to income ratio is determined by summing up all your debts and dividing it by your monthly income. The ratio is an essential aspect since it enlightens you on whether you are managing your debts. If the ratio comes close to 45%, then you should be worried.
Also, the ratio will help you determine your creditworthiness, and it’s an essential factor to consider before you get into any other debt. Creditors tend to deny people with high debt to income ratio loans, and they often advise that one should clear their debts before applying for other debts.
The financial experts at BankruptcyCanada.com often advise that you should file for bankruptcy and seek help managing your debt. Filing bankruptcy will give you a quick fresh start and is suitable for debtors with few assets and lots of unsecured debts.
Keep the ratio under control, and you should also consider increasing your monthly income by securing a second job that will cover the debts. Be aggressive in clearing all debts and ensure that the debt to income ratio is below 15%.
Determine Where Your Money Goes To
Most people never budget for their money, and they often set aside money for savings then use the rest. Well, this is the wrong financial move since you should be aware of all transactions you make.
The process can be time-consuming, but you must be connected with your money every step of the way. Please make an effort to create a budget and stick to it. Ensure that you spend less than the money you have allocated, and you can use applications to help you determine your spending habits. Once you have understood avenues that suck up all your money, you can make an effort and limit investing in those areas.
Assess Your Debt Repayment Strategy
Your debts will hinder your financial ambitions, and since they accrue interest, debt assessment can be challenging, especially if you make minimum payments. If you have a high debt to income ratio, you should consider consolidating your loans into one fund that you can easily manage.
Besides, try and reduce your expenses, create a plan that will get you out of debt, get a second job, and prioritize the repayment of debts. With a poor debt-repayment strategy, you might end up with a high credit card balance and an accumulated debt- consolidation loan, which can be tragic.
The above steps are ideal for analyzing your financial health status since they will help you review your finances. Once you have determined your financial status, you can make adjustments in your lifestyle, clear pending debt and ensure that you save enough for a rainy day.
The financial review will help you determine the amount that you need to spend, save, and the fraction that you should allocate to debt repayment. Your priority should be to establish financial independence, therefore, make an effort and review your finances today.