 |
| Odunayo Adeniji |
Odunayo Adeniji
odunjoy.adeniji@gmail.com
“Health is wealth” is no doubt a very popular quote. I am yet to meet any individual who prefers an unstable health to a highly robust and productive one. This applies to both personal and financial health. Since you take care of our body by regularly assessing our health, it is imperative you take care of your finances by assessing the status of our financial health.
Financial health can be described as a state of the monetary affairs of an individual. There exist several elements to having a healthy financial life. However, income, expenses, savings, investments, retirement plans, debt and credit are major factors in determining one’s financial health. An understanding of these factors will help to clearly define how your financial health is faring.
Having a consistent stream of income that outweighs expenditure, receiving interest on saved up funds, and steady returns on investments earlier made are positive indicators of a healthy financial life if maintained. However, as beautiful as all these may sound, having a fit financial health does not come cheap. It requires the ability and commitment to make wise decisions as it relates to making and spending money.
Understanding your financial health begins with knowing what your net worth is. The World’s Billionaires whose names appear on Forbes List are assessed based on their net worth and not income. Your net worth is made up of your savings, investments, and your debts.
So, it is clear that income is not a component of your net worth. Why so? Earning a fat salary, living in a luxurious mansion, throwing big parties, buying named brands, or even driving an exotic car does not put anyone in a good state financially if such individual cannot conveniently meet up his basic financial obligations as at when due. Your net worth simply reflects the decisions you make with regards to your income over time.
Your net worth is the sum total of all you own (assets) minus the sum total of all that you owe in debts (liabilities). In other words, it is the value you arrive at after deducting all your liabilities from all of your assets. In a way, if all your assets were to be sold in order to offset all your debts, your net worth is what you have left. Therefore, your net worth is a reflection of your financial health.
Assets are resources owned and controlled by an individual. They are items with economic value. In simple terms, assets are made up of valuable things you own, such as your house or real estate, motor vehicle, investment in stocks, bonds, retirement plans, savings, jewelry cash/bank balances etc. Liabilities on the other hand include loans, mortgages, credit card balances, medical bills etc.
There are several open source software online that could assist in estimating an individual’s net worth, however, you can still arrive at your net worth by manually calculating it. Simply get sheets of paper, a pen, and a calculator. Then, make a list of all your assets with their estimated monetary values and sum them up. Make another list of all your debts with their values, then add them up as well.
Having arrived at the total values of your assets and liabilities respectively, deduct the total liabilities from total assets to arrive at your net worth. Following through this process presents to you a report of your financials, so you may appraise your present financial health. This allows you to map out a new strategies (or review existing ones) to achieve your short term or long term financial targets.
Sometimes, certain items that appear on your asset list may have element of liability in them. This is peculiar to items like houses and automobiles. Here is an easy way to handle this. For instance, you own a house valued at $300,000 with a mortgage of $200,000 on that same house. All you need to do is categorize them separately by adding $300,000 to your assets list and $200,000 to your debts list. This same rule can be applied for your automobile. Add the automobile’s current retail value to your assets list and automobile loan to your debts list. With this done, you will easily arrive at your net worth value.
Arriving at a negative net worth should not cause you to panic. You can either arrive at a positive net worth (where assets are greater than your liabilities) or a negative net worth (where liabilities outweighs your assets). Knowing your net worth is not the ultimate judge as to having a successful or failing financial health as the case may be. This is so because several other factors may be responsible for having a negative net worth.
For instance, obtaining a student loan to pursue a professional degree, which after your qualification will appreciably upscale your income in the future, and increase your chances of moving up the ladder in your career may impact negatively on your net worth now. The fact that your net worth tend towards the negative presently, and the inability to quantify the future benefits of this loan does not imply that your financial health is failing.
A negative net worth is only an indication that your earned income and investments at the moment cannot offset your financial obligations. However, with deliberate practice and consistency, this state can be reversed by growing your asset base and reducing or paying off your debts. In other words, increase savings and investments while you deplete debts and spend less. Your net worth may further nose dive if more debts are taken; especially on consumables, frivolous, or discretionary expenses.
By keeping a tab on your net worth periodically and consistently, you can easily identify where you are heading as regards your wealth. It is okay to have your net worth calculated monthly, bi-monthly or even quarterly with the goal of having an improved net worth as each period passes by.
When your net worth is calculated consistently, it will help you focus on making financial choices or decisions that propel your net worth higher by consciously reducing your liabilities, increasing your assets, or pursuing both simultaneously. Just as living a healthy life takes conscious deliberateness, so is required to enjoy financial health at its fullest.
Copyright SWAGE NEWS.
All rights reserved. This material, and other digital content on this website, may not be reproduced, published, broadcast, rewritten or redistributed in whole or in part without prior express written permission from SWAGE NEWS.
