How to identify areas of your financial life that need correction
Posted by: Arti Bhargava on Jan 27, 2020, 06.30 AM IST
Ankur believes that it is time he took his personal finances seriously. He has bought a house with a loan and managed to make some investments. Though there have been times when he was short of funds, he has mostly been able to meet his obligations on loan repayments and his expenses. He now wants to have a proper financial plan in place for his future. As a first step, he wants to know how he can assess his current financial situation and, if required, make changes in his plan.
An efficient way for Ankur to take control of his financial situation is to start with his personal net worth. It will tell him what his current position is and then decide what efforts will be needed to improve his net worth, by improving his saving and spending habits. To calculate his net worth, he should list all his assets that have a realisable value, and his liabilities. Ankur should categorise and list all his assets under different heads such as cash and other immediately accessible liquid assets, financial assets including stocks, bonds and mutual funds, physical assets including real estate and gold, cash values of life insurance policies and retiral benefits and personal assets including furnishing, art and collectibles.
He must take the current market value of the assets, which may be more or less than what he paid for it. From this he must reduce the current outstanding balance on all his liabilities such as loans, credit card dues etc. A positive net worth implies a situation where Ankur is able to meet all his obligations. A negative net worth will imply that Ankur must do all it takes to reduce his debt since he is facing a situation of insolvency.
Having a goal of a positive and growing net worth will help Ankur make right financial decisions. He will focus on reducing debt, which will reduce his interest costs and spare funds for investments. This in turn will increase his net worth. Any loans he will take will be for assets that appreciate and therefore add to his net worth. This exercise will also improve his credit profile and his ability to take loans at good rates which further strengthens his financial situation.
Ankur has to understand that taking control of one’s financial future is a continuous process. Assessing and updating his net worth periodically will help him track his progress and determine the areas of his financial life that require corrective action.
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