Every year your car needs a MOT test for roadworthiness. Twice a year you probably visit the dentist and switch out your toothbrushes. Everything that’s deemed critical in your life gets checked at regular intervals, so why overlook your finances?
It’s easy to get caught up in the grind and forget the fact that life can be unpredictable. Millions of people suffer from the consequences of inadequate financial planning every year. In fact, the Insolvency Service, a government agency, said the number of people going insolvent reached a six-year high in 2018 and the rate of insolvencies has been rising steadily since 2015 (Phillip Inman, the Guardian,27 July 2018).
Across the country people of all ages are financially insecure and a sudden blow to the economy could have devastating effects on their life. So a regular check on your financial status and the resilience of your long-term financial plan is absolutely necessary. Here are some of the aspects of your personal finances you must review periodically:
As a rule of thumb, most people are advised to have at least three months of living expenses saved up in case of emergencies. Unfortunately, most people fail to meet this benchmark. In fact, a survey from last year found that 27 percent of people in the UK said that they have no savings they can quickly access if needed in a emergency (Vicky Shaw, Independent, 8 February 2018).
It’s important to note that emergency funds are what most people would consider liquid cash savings. This is money you can dip into and access within a short period like a few hours or a day, which means wealth accumulated in fixed deposits, stocks, or property do not qualify.
Another critical aspect of financial health is debt. Household debt in the UK is also at record highs (Phillip Inman, the Guardian, 26 July 2018). Although debt itself isn’t intrinsically harmful, the level and cost of your borrowing will have a tangible impact on your lifestyle and well being.
To measure the level of your indebtedness, calculate the ratio of your total debt to your accumulated wealth. Also calculate the ratio of your monthly earnings to the amount you pay in interest every month. These two ratios should tell you how healthy your finances are.
Finally, your personal finances deserve a stress test. You should test to see what would happen if the interest rates suddenly spiked and you had to pay more on your debt, if the stock you rely on most suddenly declares a cut in dividends, if the company that employs you goes bust, or if the rate of inflation skyrockets without notice.
Calculating the outcomes of such pessimistic hypothetical scenarios should help you test the resilience of your personal finances.
These regular financial health checks could mitigate the risks of economic uncertainty for you and your family.