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Understanding Your Financial Situation

1. Understanding Your Financial Situation 

To lead a financially stable life, you need to know what your current financial situation is. If you have no clue regarding where you stand now, it can be quite tough to analyse your current financial situation. 

The prominent factor in deciding and analysing your current and future financial situation stands is financial planning. You need to know how to plan your finance. In this post, we’ll be discussing regular questions that one should answer to remain financially healthy. Once you answer these questions, you will be able to optimize your finance and lead a stress-free life. 

But you shouldn’t limit yourself to these questions because there will be many more questions running in your head. To understand your financial status is vital, so it is recommended to take a step forward and talk to your financial consultant. Let the consultant know your concern so that he/she will help you get it sorted.  

The ultimate goal of this write-up is to restart or resume your mind to focus on financial planning. Once you read this post, you will eventually get more questions that need to be answered. 

Do You Know Your Net Worth? 

Net worth is the focal point and primary question that you need to ask yourself. Basically, liabilities deducted by assets equal net worth. In other words, net worth means the amount that you don’t owe to anybody. You would have paid all your debts, so you wouldn’t owe any money to anybody, so the amount that is in your hands is your net worth. 

For instance, say you have debts amounting to $1.8 million, and you have assets amounting to $ 3 million, $1.2 million is your net worth. 

  • You are in better financial health if you have a better net worth. However, we can’t compare one’s net worth to another because different situations put people to earn more or less money. Hence, we need to have a qualitative perspective when calculating the net worth. 
  • It shouldn’t surprise you if we say that more people have a net worth in negative values. The simplest reason is overspending, and that’s pretty much expected with overwhelming marketing done by businesses. Not only marketing but also simplicity in making transactions using credit cards has made people more and more vulnerable towards spending.   

If you want your net worth to be in positive values, you must restrain from overspending. By doing so, you will be able to create a healthy financial situation or status. 

Do You Have Proper Knowledge Regarding Your Current Debt Position? 

Do you keep records of the mortgage that you took to purchase your favourite apartment? Have you lost count on endless interests that you are paying because of it? Sometimes, you would have forgotten the mortgage completely, and the bell rings only when the bank notifies. These debt issues will pull you further down.   

Questions related to debt position will arise only when you analyse. The interest is the cost that you carry forward. And this cost gets formed because of the debts that you owe to your friends, family, and banks. Both costs and liabilities will decide your debt status. 

The worrisome part about debts and interest payments is that you will not be able to consider other investment opportunities that help you make excellent ROI. You will not be able to consider investing when you owe a lot to others. 

Likewise, if your debt status is better, you will have the prospect to invest your funds in different investments. The following points will widen your scope of understanding: 

  • The cause of obtaining the debt 
  • The time duration for the debt repayment 
  • The interest rate for the debt 
  • The collateral for the debt 

Are You Aware Of Your Income Streams? 

The income you receive by selling goods or services will help you meet your expenses. If you are not born rich, you will have to earn an income to spend and save. Hence, you must have a clear understanding of your incomes as it is the bedrock of financial situation or freedom. There are two aspects to this: 

  • Values of your income earned 
  • The firmness of the income during a time period 

For instance, you might have varied income streams such as winning prize money, doing a one-time project, etc. But you need to know that these incomes don’t create stability because it is not like you will win prizes every month or one-time project will pop-up every month. The case is different when you deal with a steady income, such as a job or business. 

Your decisions should be made following the income streams. If you know to handle your income, you will slowly reach financial freedom. 

Are You Aware Of Your Spending? 

Expenses secure an equal position in the financial freedom formula. Understanding expenses is crucial to becoming financially healthy. If you want to break this down to a simpler version, divide your expenses into two: 

  • Fixed expenses 
  • Variable expenses 

So fixed expenses include rental payouts, EMIs, and more, and they incur in high numbers to meet your survival needs. 

But variable expenses include tickets for a musical show, movie, dining at a restaurant, and shopping. This may be counterintuitive for some, but shopping expenses incurred because of unnecessary purchases are variable. If you don’t want to let it happen, you must stick to the list that you carry when shopping. You shouldn’t let the item at the counter intimidate you. 

If you figure this out, you will be able to understand the long term changes in your financial status. You can think about whether there are chances for you to make financial investment any time sooner. Or are you going to let the bank enjoy all your income as interests? 

Have You Made Any Current Investments? 

It is vital to know your investment positions as they play a major role in your financial situation. Different generations have different styles of saving. The younger generation believes in investing whenever they can, even if it means starting young. But some people don’t find it comfortable, so they delay saving.  

If you are like the younger generation, you must make sure to find the right type of investment. Also, you should be considerate of the investments that you are making. This will boost your smart and strategic decision-making skills. 

But if you are in the latter section, you shouldn’t avoid saving because it doesn’t matter how late you begin, if you know how to do it. As might be expected, you must ensure that your goals match your investments.