Just as we regularly monitor our mental and physical well-being, it’s important to periodically review our financial health for potential issues. Conducting regular financial check-ups can serve as an early-warning system, highlighting potential problems and helping to strengthen our financial resilience over time.
Understanding your spending
Is your spending aligned with your earnings? Have you established a monthly budget? Do you track exactly where your money goes each month? What percentage of your income are you consistently saving? How much of your monthly spending is allocated to conveniences like coffee-to-go, dining out, takeaway meals, and ride-sharing services?
The key to building wealth is to spend less than you earn and to invest the difference wisely and, as such, knowing what your profit margin is each month is critical. A budget is a simple, yet powerful tool to help manage your money, identify spending ‘traps’ and prioritise your expenditure, but it takes discipline to scrutinize your expenditure regularly and to critically evaluate where you are going wrong. Creating sustainable wealth requires that you cut your cloth according to your means and make tough calls on what you can realistically afford.
Evaluating your savings strategy
How much of your monthly income do you regularly save? Are your savings contributions automated? Can you access your savings easily, and how frequently do you do so? Have you clearly defined the purposes of your savings?
Effective saving requires a well-thought-out strategy to ensure that you are maximising your tax deductions, using the appropriate savings vehicles, and saving enough to achieve your stated goals. Before setting your saving strategy in motion, give consideration to your short-, medium- and long-term goals, when you may need to access the money, what tax deductions are available to you, the ease at which you can access your money, the tax implications of the savings vehicle you intend using, and the reputation of the product provider you intend using.
Managing your debt responsibly
How significant is your unsecured debt? Are you reliant on credit to sustain your lifestyle? Do you consistently make debt repayments on time? Do you have an actionable debt reduction strategy? How does carrying debt impact your emotional well-being?
Debt is an easy place to end up but a difficult place to escape from. If you have unsecured debt in the form of credit cards and retail accounts, it is advisable to keep tight control of the situation. Specifically, if you’re using credit to fund lifestyle expenditure such as groceries, rent, clothing and entertainment, serious intervention is required. Besides negatively impacting your credit score and your ability to secure financing in the future, debt can place a huge emotional burden on you and your loved ones. Take an honest look at your debt-to-income ratio, being the total of your monthly debt payments divided by your gross monthly income, and take immediate action if your debt exposure is too high and/or unsustainable.
Assessing your liquidity
How quickly can you access cash in an emergency? Do you have sufficient funds to cover at least three to six months of living expenses? How stable is your employment situation?
Your emergency capital is effectively a cash cushion designed to tide you over financially in the event of high, unforeseeable expenses, including eventualities such as job loss, serious medical diagnosis, or a personal tragedy that impacts your ability to generate an income. Lack of emergency funding can not only rob you of your peace of mind but can force you to take out expensive debt, which only serves to perpetuate the cycle of debt and inability to build wealth.
Reviewing your debit orders
When was the last time you scrutinised your bank statement? How much of your monthly expenditure goes to subscriptions like gym memberships, streaming services, mobile phone contracts, and other recurring expenses? Which of these can you genuinely eliminate?
While the ease at which we are able to subscribe to services is convenient for our busy lifestyles, it’s not always great for our bank accounts, and keeping track of our monthly subscriptions as they accumulate can be difficult. Make a concerted effort to conduct a careful analysis of your transactional account to ensure that every debit order and/or subscription can be accounted for and vetted in terms of its place in your overall budget.
Calculating and diversifying your net worth
Do you know your net worth? Are your assets adequately diversified across different classes? Is the majority of your wealth concentrated in one asset type? Are your assets liquid enough for your potential needs?
While it’s important to know your net worth, it’s also important to analyse the nature of your wealth to ensure that your assets are adequately diversified and that your risk is spread appropriately. For instance, if the majority of your wealth is held in business interests and formal retirement funding, you may expose yourself to liquidity risks. On the other hand, if the bulk of your wealth is in property, you may be unnecessarily exposing yourself to the risks endemic to a single asset class.
Planning effectively for retirement
Are you actively contributing to a retirement fund either personally or through your employer? What proportion of your pensionable earnings are allocated towards retirement savings? Have you clearly defined your retirement timeline and ensured your investment strategy matches both your timeline and risk tolerance? When was the last time you reviewed your retirement plan?
While retirement may seem far away, it makes sense to take advantage of the tax benefits of retirement fund investing and to ensure that your investment strategy is geared for growth over the long term. If you don’t yet have a retirement plan in place, find an advisor who can develop a baseline plan for you aimed at maximising your tax deductions and who can help you select an appropriate investment strategy for your funds. If you’re investing through your employer’s retirement fund, make sure that you fully understand the investment strategies available to you, as the default option on group schemes is often a low-risk, lower-return nature, which may not be suited to your investment timeline.
Will
Hard questions: Do you currently have a valid Will? If not, what’s preventing you from drafting one? If yes, when did you last update it? Who knows about its existence and location?
We often take for granted how much changes over the course of a single year, and while you may feel confident that your Will is up to date, it’s worth taking out your Will to double-check its contents. At the same time, check that your Will is dated, signed in full on each page, and that your spouse or a loved one knows where an original copy of the document is kept. Very often, deceased estates face massive delays because the deceased’s loved ones are not even sure whether a Will exists, let alone where it is held in safekeeping.
Protecting your income
Hard questions: Is your household reliant on more than one income? Do you have comprehensive income protection insurance? Does your cover include temporary disability? What are the waiting periods, and do you have emergency funds to cover them? Have you made full disclosures to your insurer, and do you understand all exclusions?
Disability insurance is one of the most complex when it comes to the long-term insurance industry, so ideally, seek the advice of an independent advisor when it comes to analysing your income protection. Understanding the nuances of your cover and what they mean practically at claims stage is key to ensuring that you are adequately protected in the event of either temporary or permanent disability. Generally speaking, your income protection benefit depends on your nominated income, so be sure to check your policy document and the details that your insurer has on record.
Updating beneficiary nominations
Hard questions: Are you fully aware of all your active policies and investments? When was the last time you reviewed your beneficiary nominations? Do you know which policies pay into your estate upon death, and why? Do you clearly understand the beneficiary nomination process for your retirement funds?
Beneficiary nomination plays an important role in your overall estate planning, so it is important to check your nominations regularly to ensure that your insurer and/or investment provider has the correct information on their system. Incorrect beneficiary nomination can not only adversely impact the liquidity in your estate but can leave your loved ones financially vulnerable in the event of your death. Ask your financial advisor to provide you with a detailed policy and investment schedule reflecting your beneficiaries to ensure that your wishes are fully expressed and that your policies are appropriately structured to achieve your estate planning goals.
Have a lovely day.
Sue
