Financial Health: Your Vital Statistics

by Maria

Most people can only guess where they stand in terms of their financial health most of the time! We are not talking about people who ‘don’t care’ here; we are talking about perfectly reasonable and interested people. People who when feeling poorly take their body temperature, measure their pulse, have blood pressure monitors and use them, and hop on the scales far too often.

What I am asking is if we are smart enough to take all these measurements when it is about our physical health why do we fail to monitor our financial health?

It seems to me that we fail to take the measurements describing our financial health for three main reasons: a) we can’t decide what to measure; b) measurements don’t make sense without a norm and this is personal; and c) we are anxious about what we may need to do to get financially healthy.  In this post, I’ll address only the first issue; the one about the measurements we need to take as an initial step on the journey to financial health.

All you need for tracking your trip to financial health is to work out five numbers. These are: income and spending; assets and liabilities; and net wealth.

Income and spending

Working out one’s income should be unproblematic. However, there is the matter of individual income, family income and company income; the difference between pre-tax and after tax income; and the importance of yearly, monthly, daily and hourly income.

So, keeping things simple, we can say that income is all money that, figuratively speaking, goes in your or your family’s pocket. This can be from primary employment, benefits, occasional employment, pensions, property, investments, royalties etc. The money that makes its way into your pocket has obviously already been taxed.

Spending (or expenditure) is everything that leaves your pocket. Spending fits under three categories:

  • constant expenditure (this is the expenditure that must be incurred, cannot be easily controlled and includes mortgage, any payment on loans, secured debt, electricity, gas, water rates, etc.);
  • changeable expenditure (this is the expenditure that can be cancelled in a real emergency, at least temporarily, or can be negotiated like life insurance, health insurance, dental plans, entertainment packages etc.); and
  • variable expenditure which cannot be cancelled or negotiated but can be controlled (expenditure on food, for instance).

Working out your spending can be time consuming but is relatively straight forward. All you need is your bank statements for the last three months. Working out your variable expenditure can be a bit more tricky and you may need to record all you spend for couple of months; it is a bother but so much worth it.

Assets and liabilities

I find the definitions of assets and liabilities offered by Robert Kiyosaki in his book Rich Dad Poor Dad to be straight forward and useful ones. These build upon a very clear and easy to work with criteria – whether money gets in or out of your pocket. So, assets are ‘everything that puts money in your pocket’ and liabilities are ‘everything that takes money out of your pocket’.

Pretty clear, isn’t it? Clear as the distinction between assets and liabilities may seem there is always space for confusion. A common confusion is the one between assets and possessions. Possessions are all the things one has, like savings, cars, jewellery, furniture, house(s) and land. There is nothing wrong with possessions – in fact they often give us our sense of security. However, possessions do not usually generate value or more wealth; possessions do not necessarily work for one’s financial health either. More interestingly, possessions are neither assets nor liabilities but could become either.

Net worth or net wealth

One’s net wealth is probably the most useful number in terms of long term financial management and planning. It is also the most difficult one to face; a bit like standing on the weighing scales with a racing heart, looking down to see the number where the little arrow has stopped.

Please remember that the number doesn’t matter; how we feel about it doesn’t matter; what matters is that it allows us to plan and act – our financial future or our weight loss.

You can calculate your net wealth (or worth) using the following formula:

(Assets + Cash and savings + Non-income generating possessions + Retirement Assets) – Liabilities = Net Wealth

Even easier you can use the following net wealth calculator and it comes with a very brief guide. Alternatively, you can use any net wealth calculator you can get your hands on – just go on and do it!

Final words

Most people emphasize that ‘getting there’ involves knowing where you want to go. Whilst this is true it is equally important to know where you are. There are five numbers you need to work out if you want to know where you are in terms of financial health: income and spending; assets and liabilities; and net wealth.

What are you waiting for? Go for it!

This post was written by Maria at The Money Principle who also wrote the editor’s pick at a recent carnival about personal finance not being simple.

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{ 6 comments… read them below or add one }

Crystal April 24, 2012 at 10:17 am

“The money that makes its way into your pocket has obviously already been taxed.”

One addition as well as a caution for self-employed folks in the US – money from self-employment most likely has NOT been taxed. And depending on your tax bracket, the nasty surprise can be HUGE come tax time.

To make the math easy, assume that you’ll pay 15% in self-employment taxes. To that percentage, add your applicable income tax bracket percentage. For instance, if you’re in the 15% tax bracket and you add another 15% for self-employment tax (30% total), you can count on nearly one-third of any self-employment income going to pay your federal taxes come April.

So plan your spending and saving throughout the year to avoid coming up short when it’s time to file your tax return.
Crystal recently posted..Penny Thots and Possum LivingMy Profile

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Maria@moneyprinciple April 26, 2012 at 4:46 pm

Thanks Crystal. Yes, money from self-emplyment and side-hustle is not going to be taxed. People have to make sure that enough is put aside for tax (and other contributions but this vary between countries).

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MoneySmartGuides April 24, 2012 at 10:04 pm

Nice post. Sadly I know too many people that not only don’t take care of their financial health, but they also neglect their personal health and never see a doctor.
MoneySmartGuides recently posted..Revisiting The Buffett RuleMy Profile

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Maria@moneyprinciple April 26, 2012 at 4:48 pm

Still, when they don’t feel well soneone takes there temperature, or pulse. They step on the scales (we are not talking taking action here, not yet…). There are people who have not seen there financial statement for years!

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BusyExecutiveMoneyBlog April 25, 2012 at 1:14 am

Completely agree Maria! Most people will look at their assets and completely discount their expenses.
BusyExecutiveMoneyBlog recently posted..Financially, what would you do differently if given the chance?My Profile

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Maria@moneyprinciple April 26, 2012 at 4:49 pm

Strange isn’t it? I think that great confusion rules in this area and that it is out duty to support people deal with it.

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