Understanding Financial Priorities
Scrutinizing your financial wellness will help you well getting your priorities straight!
Some individuals might make mistakes in setting their financial priorities like saving more for their children's college education and a lesser for their own retirement. Here are some questions that may help you think about how manage your finances:
- What major fiscal challenges do you face?
- State your financial positives in terms of revenue, debt management, and savings.
- How do you think you arrived at this point - and what would you like to see altered?
- How well organized are you for a financial emergency? Write it out now: The amount we have put away an emergency fund is _______.
- How is the subject of money addressed in your family: emotionally or rationally?
- Who makes the fiscal decisions? How come? How much collaboration is there?
Another tool you can use to help is the basic solvency ratio.
Basic Solvency Ratio
This ratio signals your power to meet monthly expenses in case of any emergency or calamity. It's calculated by dividing the near-term cash you have with your monthly expenses.
Basic solvency ratio is Cash / Monthly expenses (this ratio isn't mentioned in percentage).You are able to also call it an emergency or contingency preparation ratio; this ratio helps you prepare for unexpected troubles.
For example, a 30-year-old businessman whose wife had an emergency gall bladder surgery last year. In spite of the fact that they had enough insurance to take care of exactly such an event, due to a few administrative problems on the day of discharge, he was informed that he would have to pay in cash as the bill couldn't be settled.
He had a hard time arranging the funds on an emergency. He was fortunate to have good acquaintances and relatives who lent him the money. But not everyone have such great admirers or relatives to bail them out at such short notice. I'm sure no one wants to be in the same shoes.
Let's examine how much money is adequate. Here is where basic solvency ratio comes handy.
The numerator of the basic solvency ratio formula, cash (near cash), would commonly comprise of the following things:
• Savings account
• Bank fixed deposits
• Liquid funds
• Cash on hand
The above elements are liquid assets which come on handy at the first possible hint of financial problems. Liquid funds may be delivered immediately. Same goes for fixed deposits as they may be broken and liquidated at once in case of an emergency.
Only the mandatory fixed and varying expenses are taken here for ease. Any amusement outlay shouldn't be taken as these expenses can be quashed.
Mandatory fixed expenses include the income you pay for, loans, insurance premium, and rent.
Mandatory varying expenses, on the other hand, comprise of food, transit, clothing/ personal care, medical care, utilities, education expenses and assorted compulsory expenses (the above expenses can vary depending upon individuals).
The total of the above divided by 12 (that is 12 months) helps you attain the monthly average as your variable expenditure might change. Assuming that you have cash of 60,000 and median monthly expenses of 25,000 your basic solvency ratio would work out to: 60,000 / 25,000 = 2.4.
But is it great?
Not quite. An Ideal ratio should come to 3.
What does the number 3 mean?
It means that you must have money equal to or at least 3 months of your mandatory expenses in a contingency or emergency fund.
How come just 3 months? This is because research shows that 3 months time is enough to emerge from any type of financial pinch. As individuals near their retirement age, they should make certain that this fund is kept up to six months of their required expenses. The fund should be divided and kept in the form of cash, fixed deposit, or liquid fund.
Some More Tips
Capitalize on free training opportunities. Attending free seminars and training sessions to advance your knowledge is a very good investment for your future. Setting career goals in life is really crucial as the job market is highly competitive.
Revise or update your will to make certain that your wishes are secure and accomplished. You need to have estate planning regardless how small your estate is. Some individuals will just assume that their assets and possessions will automatically pass to their family but without a legal will, the State might step-in and allocate your property or estate.
Valuate your insurance coverage. Check whether your car and homeowner policies are updated and their deductibles are fair. You might seek life insurance particularly if you're the head of the family working full-time. You may likewise think about buying long-term-care insurance, to aid you in paying for nursing care or assisted-living when you get old.
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