Financial Status: How to Evaluate & Improve Your Financial Health

Last Updated – Sep 27, 2021 @ 1:51 pm

Similar to physical health, our financial health is crucial to living a happy and successful life.

In this article, we’ll discuss what financial health is along with the factors that determine your financial fitness. We’ve also included helpful tips to help you improve your financial health faster and achieve your goals.

Contents

What is Financial Status (and Financial Health)?

Financial status or financial health refers to the state and condition of your finances.

A person who has most of the bases covered (has a decent income, zero or minimal debt, has investments, life insurance, etc.,) is in excellent financial status.

On the other hand, someone who owes a lot of debt, has zero savings, no emergency fund, and has low cash flow is considered financially unhealthy.

Worried you might not be as financially fit as you thought? Here are some of the usual signals that reveal if a person is heading towards a financial meltdown.

You don’t have a spending plan or budget
You don’t have money for emergency situations
You have plenty of debt
You purchase stuff on a whim (without thinking if you can really afford it)
Your income barely covers your needs
You invest without doing your due diligence
Complete lack of a retirement savings game plan

If you’re guilty of some of the items mentioned above, don’t fret. There are plenty of ways to get out of a financial rut. But to do that, you must first understand the core principles that determine a person’s financial status.

Factors that Determine Your Financial Status or Financial Health?

So how exactly do you determine your financial status?

The first step is to learn about the 3 main factors that determine your financial health.

Your net worth – It’s a snapshot of your financial position at a specific point in time.

Your net cash flow – The net cash flow position is the amount you get after you subtract all money going out (expenses, payables, etc.,) from all money going in (income, earnings, revenue, etc.,)

Your financial ratios – shows your net cash flow position. It will give you insight into how your income is being used.

How to Determine and Calculate Your Net Worth?

To know your net worth, subtract your total assets and total liabilities.

Net Worth = Total Assets – Total Liabilities

Total assets include your available cash on hand, savings, investments, and properties that you already own.

Total liabilities are your payables, which include debt, mortgage, and other stuff that you need to pay. Examples are: payments to your car/house, rent, monthly expenses, your kid’s tuition, among others.

Your net worth is a key indicator of your financial health. Tracking it consistently will help you detect any potential long-term financial issues and help you avoid them.

Here are the steps for calculating your net worth:

List all assets along with its monetary value
After writing it down, add it all up. The total amount is your total assets.
Do the same 3 steps for all your liabilities.
To get your net worth, subtract the total liabilities from your total assets.

How to Determine and Calculate Your Net Cash Flow?

Cash flow refers to the money that is going in and out, showing the increase and decrease in the amount of money a person or a business owns.

Net Cash Flow = Total Money Going in – Total Money Going Out

This means that the net cash flow position can be positive, negative or zero.

A positive cash flow indicates a Cash Surplus.

A negative cash flow indicates a Cash Deficit.

Like net worth, knowing your cash flow is crucial in determining your financial status. It gives you an idea of how much money is coming in and how it is being used. With this data, you can adjust your finances accordingly to match any plans or goals that you’ve set.

How to Determine and Calculate Your Financial Ratios?

Think of financial ratios as different segments of a pie, with the pie representing your financial status.

These ratios help you identify your capacity in various categories of your finances.

Your financial ratios can be divided into 4 categories:

Basic Liquidity Ratio

It tells you how many months you can live off on your liquid assets (cash on hand or assets that can be easily converted to cash) in relation to your monthly expenses. Think of it as your emergency fund.

Basic Liquidity Ratio = Liquid Assets / Monthly Expenses

Non-mortgage Debt Service Ratio

It refers to all the money you have to set aside each month to pay all service debts that are non-mortgage type.

Non-mortgage Debt Service Ratio = Total Monthly Non-Mortgage Loan Repayments / Total Monthly Take-Home Income

Mortgage Servicing Ratio

Refers to all the money you set aside each month to pay all monthly property loans on installment.

Monthly Service Ratio = Monthly Mortgage Repayment / Gross Income

Savings Ratio

It refers to your overall saving capacity or how much you are able to save each month.

Savings Ratio = Total Savings / Net Cash Inflow

Steps to Evaluate Your Financial Health?

Now that you know the different elements that help determine your financial health, it’s time for an assessment to see if you are financially fit.

The first step is to list the following:

Your assets – your income, savings, investments, and properties
Your liabilities – Total recurring expenses

The next step is to start using the formulas provided above to determine your net cash flow, net worth, and financial ratios.

How did it go? Did you see favorable results? What are your key takeaways from the answers you arrived at?

To help you with your assessment, consider asking yourself the following questions:

Do you have enough liquid assets or an emergency fund for unexpected events?
How much of your income goes to both mortgage and non-mortgage expenses? Do you see any way of reducing them if you find some areas that need adjusting?
How much do you pay in debt? Which ones are high in interest? Which ones need immediate attention?
Are you able to set aside money each month for retirement?
How much are you able to save? Are you able to invest some of that money for passive income?
Are you protected against accidents and injuries? Do you have life insurance?
Will you be able to meet your children’s educational needs down the road?

Answering these questions could be daunting.

However, by answering each one you can get an accurate understanding of your current and future financial situation. Using this information, you can adjust accordingly to make sure your strategy aligns with your goals.

How to Improve Your Financial Situation?

Knowing your current financial state is only half 0f the battle. These 7 tips will help you build a strong foundation for becoming and staying financially fit.

1. Set Financial Goals

S.M.A.R.T stands for Specific, Measurable, Attainable, Relevant, and Time-bound.

You have to go beyond vague or general financial goals like “get rich in 5 years time, or, increase my monthly savings” as these don’t provide specific actions to take for hitting your targets.

For example, let’s say you want to save 30,000 pesos by the end of the year so you can fund your small business idea.

Using the S.M.A.R.T financial goal concept, your strategy would look like this:

Specific: I want to save 30,000 pesos by the end of the year.

Measurable: At the start of the year, I will set aside 2,500 monthly.

Attainable: Absolutely. Php30,000 is an amount I know I can save up for in a year.

Realistic: Yes, I can make space on my budget for saving 2,500 monthly.

Time-bound: I have until December to save the whole Php30,000.

Your goals need to be specific and clear in terms of the What, When, and How of it.

2. Pay off all debt

When left unchecked, debt can quickly turn your financial dreams into a nightmare.

If you feel like all the money you owe starts rolling down like a big snowball, it’s time to implement a plan to get it down to size fast. Here are 4 steps you can implement ASAP:

Find out how much debt you have
- Make a list of all your debt/loans
- List them down per interest rates and due dates
Choose a strategy for paying off your debt
- Snowball method
- Envelope system
- Pay debts/loans with the highest interest first
- Dedicate a portion of your monthly income to paying off debt
- Balance transfers to lower interest rate cards (credit cards)
What got you into debt?
- Cut out expensive habits
- Be more disciplined in spending money
- Save before you spend
- Track your spending
Set periodic goals
- Regularly check the status of all your debt to make sure you’re on track with clearing them per the target period you’ve set.

3. Save regularly

As one popular quote goes, “It’s not how much money you can make, it’s how much you can keep”.

Having an effective savings system will help you grow your assets and have some money stashed for rainy days.

One popular method of budgeting, the 50-30-20 Rule, recommends that you keep at least 20% for savings. And while there are no hard rules as to how much you should save, keeping 10-20% of your monthly income is a good place to start significantly building your assets.

Automate tasks and set alerts in your calendar. Leverage your bank’s features so you can easily move money between accounts or pay bills. Some checking accounts offer auto-debit features that let you automatically stash away a certain amount into your savings account. Leverage cashless payment options to make saving and paying bills easier.

4. Learn to budget your money effectively

Break down your expenses into Discretionary and Non-discretionary items to get a solid understanding of your monthly spending. Use budget worksheets for tracking.

There are several ways you can use to budget your money effectively, these include the Envelope system, 50-30,20, Zero-sum, and more. For more in-depth learning on budgeting, check out this guide.

5. Build an Emergency Fund

An Emergency Fund is money that you set aside to act as your safety net. Ideally, you should keep at least 3-6 months worth of income for quick access should an unexpected expense come up.

Not only will this give you the peace of mind of knowing you have money reserved for emergencies, but it also shields your savings and investments against being used unwantedly.

Read our in-depth guide showing steps and options on how to build an emergency fund.

6. Boost your income

There’s a limit at how much you can save right now, but there’s no ceiling when it comes to how much you can earn.

Whether it’s striving for a promotion, getting a side hustle, setting up a small online business, taking freelance online work—there are lots of ways to get additional cash flowing.

Why is it important to boost your income? Because doing so lets you have more assets to leverage for achieving your financial goals.

More money can be used to: buy life protection, grow your assets through various investments like stocks, mutual funds, ETFs, fixed income securities—etc., buy health insurance and car insurance, invest in real estate, and more.

7. Invest and Grow Your Money

Done right, this will help you build an asset base that earns for you throughout the years and let you live off comfortably after retirement.

If you really want to take your financial success to a new level, you should leverage the various tools that will help you multiply your money and have it earn for you.

Here’s a list of guides to help you get started: