We are no stranger to gyms and workouts, exercising to ensure that we are physically fit and healthy. But how many of us had taken a deep, real and truthful look at our financial health?
Here are the basic steps to be financially FIT:
1. Keep track of your everyday expenses
Before prescribing any medication, a doctor would first diagnose a patient. Likewise, before you take any action, ensure that you understand your current financial position. Record all expenses and label it as ‘Needs’ or ‘Wants’. At the end of the month, you will have a rough idea on how much you are spending on Needs vs Wants.
There are plenty of apps to keep track of your expenses on your smart phone, but feel free to use a spreadsheet or even an expenses journal should you prefer.
2. Saving for a rainy day
Once you’ve understood how your money flows, now it’s time to cut out unnecessary spending. Determine how much are you spending on those milk-tea everyday. Use the extra cash to build your emergency cash reserves. You should have at least 3-6 months of your income saved in your bank account. If needed, you can also store these monies in a 1-month Fixed Deposit account.
3. Ensure you’re protected
Insurance has always been one of the most underrated financial products. Many of us are under-protected. The priority of getting an insurance are as follows:
- Medical Card
- Personal Accident
- Death/TPD/Critical Illness
Understand the different types of policies in order to get the best plan suited to your needs. The general rule of thumb is to spend 10-15% of your income on insurance. As everyone have different needs, contact me to find out how much do you need to be adequately covered.
4. The magic of compounding Interest
There are many reasons to invest, but the main objective is to beat inflation. Say if you saved RM100,000 in your current account not generating any interest, 20 years later when you retire, the same amount of money is only worth RM45,000, a lost of 55% in value!
There are plenty of investment asset class, the common ones are stocks, properties, unit trust and gold. There is also lesser known investment vehicle such as P2P lending and ETFs. Before investing, you need to understand what you are investing into, avoid investment opportunities that sound too good to be true.
Understand your risk profile and pay attention to your life goals when you invest. Do not invest in a long-term investment when you need the money in the short-term.
As cliché as it may sound, the best investment is always investing in our own knowledge. Spend time to expand our circle of knowledge on different matters.
5. Keep track of your net worth
Tracking expense alone is not enough to determine whether are we building our financial muscles, we must also keep track of our net worth. Net worth is calculated by adding up everything you have and minus the total amount you owe to banks and other creditors. Perform this exercise at least once a year to ensure that you are growing year by year.
6. Inheritance/Estate Planning
We often take for granted that our wealth will be distributed to our loved ones after our passing, but reports showed that there are assets worth a staggering RM60 billion left unclaimed. As long as you have a bank account, you should prepare a simple Will to ensure that your love ones will benefit. If you have young children, consider setting up a Trust. Visit our tool to have a hands-on experience on how to write your own free Will.
There you go, these are the 6 simple steps to ensure that you are financially healthy. A whole new decade, the 2020s is just around the corner. Let 2019 be the year of learning and growth and propel ourselves to the new decade.