A simple way to take stock of our financial health

Financial Planning

Financial health refers to ‘where we stand today’ with respect to our finances and what we need to do in the coming years to handle future expenses and financial goals.

In this post, I would like to describe a simple exercise to assess our personal financial health. This process can be automated with the integrated financial planning template.

The process in which expenses, investment amount needed for financial goals, along with expected salary are projected into the future was a pivotal exercise in my financial learning curve.

The idea is to create a table with the following entries:

  • We take our current salary and project it in future with some reasonable growth rate.
  • Do the same with current expenses with an assumed inflation rate
  • Determine the total investment amount required for all out goals and if possible  increase it at some rate for the coming years.
  • Determine the amount that we can invest each month – now and in future (increased or decreased at some rate).
  • Consider any current and future liabilities.

We might end up with something like this. This is a screenshot from the above-mentioned financial planning template.

financial-planning-template
click to enlarge. 

The red cells are those years when we will be investing less than required  for our goals.  If there are too many red cells, then goal priorities and inputs may have to be altered.

This exercise can be a confidence booster for a few and scary for many – including me.

  1. This is only a projection with assumed inputs. The future can turn out better (or ..) than this.
  2. If we keep out head down and invest systematically with a solid strategy in place, with a bit of luck, and in time, the number of red cells may come down.
  3. I did not lose sight of this hope when I first did this exercise 6 years ago, and I would urge you to do the same.
  4. Like any other goal-planning exercise, it is  important to do this assessment once a year.
  5. In some cases, the red cells (inability to invest enough) can be reduced with small changes in lifestyle.

After I did this exercise, I had a clear idea of where I stand and what I can hope for in future. To be frank, I was disappointed that a couple of my wants could not be accommodated after accounting for my needs. Well, we can’t have everything, can we? 

Use the freefincal robo advisory template 

or

Download the Integrated Financial Planning Template

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6 thoughts on “A simple way to take stock of our financial health”

  3. Thank you for this post. I am using something similar for the last 5+ years to track where I am. However I have added another “feature” by which I try to gauge how much insurance cover is required. I come up with the amount by doing a NPV of all the future expenses and reducing this number by the current assets. In my mind this is the delta that needs to be filled by my insurance cover. This will take care of all the future expenses, goals and maintain the standard of living. As I do this calculation for each year, I can also see a trend on when my insurance cover reduces (as I achieve goals, meet or beat my savings target for the year) to a point when I no longer need a insurance cover. Please let me know your thoughts.

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