How to Take a Financial Health Check
May 2021 – 6 minute read
Key takeaways from this article:
- Taking stock with a financial health check
- Financial position
- Raising cash
- Current cash flow
Taking stock with a financial health check
A financial set-back is tough. Whether it’s due to a natural disaster, loss of a job, a change to your family circumstances, or even a downturn in the economy or financial markets, it takes time and focus to work your way through the detail and get yourself back on track. This is often made worse by the emotional impact of the set-back too. But the good news is there many people willing and able to help and lots of ways to help yourself too. A great starting point is to take stock of where you stand financially – let’s call it a financial health check. Once you understand where you are right now it helps you to work out your best way forward to get back in control of your finances.
So, grab yourself a pen, paper, and calculator or your favourite spreadsheeting program and we'll go through some simple steps to help you get a better understanding of your current financial situation.
Firstly, review whether you have any insurance policies that may help you through the situation. This is probably a more obvious starting point if you've been impacted by a natural disaster such as flood or fire, however if your current financial situation is due to job loss or perhaps injury then there may be income or salary continuance insurances that you have overlooked. It's not uncommon for people to be unaware that they have insurance cover as part of their superannuation. So, check that out as a starting point.
Then put together your statement of financial position. This is simply a list of all the things you own and all the money you owe to others. It may be helpful to write down all the things you own in a list on the left-hand side of the page assigning it an approximate value, then a list of all the money you owe on the right-hand side of the page, again assigning it an approximate value.
Looking at the things you own, don’t forget to include things like
- your home and/or investment property
- your car, caravan/trailer, boat/jetski
- your personal effects such as clothing, furniture, technology, artwork, jewellery
- savings accounts and investments such as your superannuation or shares
- sporting equipment.
On the loans side of the ledger:
- Home loan or investment property loans
- Personal loans or car loans/leases
- Credit cards
- Buy now pay later facilities.
As you go through your list of the things you own, take note of how much you have in savings that may be able to help you through this tight spot. Perhaps you have an emergency fund ready to help you through this time.
As you are going through your list of the things you own you might identify some things that you haven’t used in some time or no longer need. You know, that set of golf clubs that you haven’t used in the last few years. Or perhaps, the old bike that you never got rid of when you upgraded. The designer evening gowns you no longer wear now that you have 3 children and a mortgage. All of these things can be turned into cash by selling them. Cash that could help you get through this set-back. All of these things can be replaced in future once you’re back on your feet again.
Depending on your situation you may even need to consider downgrading your car or home, particularly if they have debt with high interest rates attached to them as well. If you’re currently a 2-car family, consider whether it’s possible to operate with just one car. The savings by not having to pay 2 sets of registration and car insurance, and decreased running costs are considerable. Not to mention the interest costs and repayments if you have finance on the car too. If you’re single you may even be able to use public transport rather than retaining the cost of running and maintaining a car, or perhaps you could even dust off the old push bike and use that instead. The more short-term sacrifices you’re prepared to make the better chance you give yourself of recovering sooner.
It’s not a welcome job, or an easy one, but bringing in some extra cash by selling unused or unwanted assets could be the difference between you getting back on top of things sooner rather than later.
Current cash flow
Once you’ve got a clearer understanding of your financial position, it’s then time to look at what money you have coming in and how that is currently being spent, that is, your cash flow. You may be able to identify ways to maximise your income and minimise your costs. It helps to start by looking at the current situation holistically and then drill down into changes you'd like to make.
Start with the money you have coming in. This could include your wages, your partner’s wages, any government benefits you receive or may now be eligible for, investment income such as dividends on shares or rent from an investment property. As we said earlier, there may also be an insurance policy that can add to your cash flow too. As with your assets and debts write them all down with the relevant amounts.
Then move onto all the things you spend your money on. It helps to be systematic and thorough here. Start with all your commitments to other people/businesses. For example:
- Loan repayments – home loan, personal loan, investment loan etc.
- Credit card repayments.
- Phone plans where you are paying off your phone as well as purchasing your data.
- Buy now pay later facilities.
Then move onto the things you need to pay. Things such as:
- Housing – rent, rates, utilities, etc.
- Transport – fuel, parking, tolls, fares etc.
- Health – exercise, medications, doctors’ fees etc.
- Basic personal services – necessary clothing, education, personal grooming etc.
And lastly, think about the things you choose to pay to maintain the lifestyle you want. Things such as:
- Entertainment – music, sport, movies, eating out etc.
- Enhanced personal services – cleaner, gardener, more expensive clothing etc.
A Spend Snapshot tool like the one on the Davidson Institute website may be helpful in pulling together your spending list.
Then make the comparison between how much you have coming in and how much you are spending. If you have more coming in than you are currently spending, then you may not need to make many changes at all. However, if your current spending is more than your current income then you’ll want to look at ways you may be able to reduce your spending.
So, there's a few simple steps to check your current financial situation. The next steps are to make changes to help you improve your financial health which are covered in this article Getting back on track.
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Things you should know
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice.
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