When it comes to assessing our financial strength and weakness, many of us just remain clueless. It is partially because we are not aware of the importance of such an evaluation. Another reason for such ignorance is probably that we do not know where to begin with. Before everything else, we should know the consequences of not doing an analysis of our financial strength and weaknesses.
Just consider a situation when your income suddenly stops due to a contingent situation such as an accident, a shutdown of your company, a nationwide financial slowdown, or major turmoil or just your inability to work due to deteriorating health. We can even consider the current situation of people losing their job due to Coronavirus. This leads to unemployment for millions. In such situations, your financial strength is tested. Even when you have large liquid savings in a bank account or similar common accounts that do not offer any substantial growth for your money, they do not save you from utter financial crisis for long since the growth of money is not enough to make you stay afloat above the depreciating value of money.
So, you need to achieve financial growth with steady investment and corresponding financial planning. How can you know you have done it the right way? Well, this is why it is important to go through a time tested procedure to assess your financial status.
Here we introduce a must follow the checklist to assess where you stand financially.
- How Much Insurance Do You Have To Meet Contingencies?
This is arguably the most important consideration when it is about evaluating your financial status. In case of death, disability and disease of the earning member of a family, a compensatory sum of money is immediately needed to meet the contingent situation. Your financial planning should begin with this. Before making investments that provides you growth, you need to make provision for assured financial support for your dependents in case of any contingency.
- Is Your Investment Returns Secure From Inflation?
If you have put all your money in a regular bank account considering your money to be safe and growing with the regular interest rate, you are actually killing your hard earned savings.
Yes, money not achieving growth over and above the inflation is actually a degrowth of money.
So, What is inflation?
To explain it in common man’s term, inflation is the depreciating value of money which in regular life reflects the rising cost of goods and living. Thanks to inflation, what your money can buy now may not be enough to buy the same thing a few years down the line. Naturally, the financial growth you achieve should beat this rate of depreciation of money.
If with stocks, PF, bonds, Mutual Funds, annuity schemes and other investments together you achieve a growth of 10% per annum, while the inflation rate is 8% for the same period, your actual growth of money boils down to only 2%. Now you need to evaluate the return of your investments against the projected inflation rate.
- How Secure Your Financial Instruments Are?
Now you need to evaluate the security of your money with the chosen financial instruments. Obviously, you neither can gamble with your hard earned money by investing all your savings in stocks nor can remain satisfied with the depreciating growth of very secured financial instruments like bank FDs, PF, etc.
You need to take the best of both worlds while avoiding the negative factors from both ends. While your money in selected stocks and MFs can earn a better return year on year, your secured investments in other instruments help you keep your investment portfolio secure. Thus with diversification into various instruments, you can achieve both security and growth.
- What About Liquidity?
What happens when you need a few thousand rupees in hard cash? Obviously, in emergency situations nothing comes as immediate help as the hard cash. So, beside securing growth and ensuring security for your money over a period of time, you need to make provision for liquidity.
In case of emergency you should be able to withdraw cash to meet your immediate and emergency needs. Savings and investment instruments vary in their liquidity. Savings bank accounts, some bonds, some mutual funds and stocks offer high liquidity while endowment policies, unit linked insurance plans, many mutual funds, annuity or pension plans are low on liquidity.
- How Much Shortfall Is There To Achieve The Financial Target?
Like everything in life, success with your financial planning obviously requires fixing your objective for the long term and targets for a shorter span. Now as per the target you can easily assess the shortfall in the required fund.
For example, if you need to buy a property, you constantly need to evaluate and keep a close tap on the growth of your investments and accordingly measure the value against what you need.
So, evaluate this Checklist at regular intervals to be sure that your goals are met without much hiccups in between. These are just the immediate steps to keep you on track in your financial journey. For any further advice, you can get in touch with our financial advisors who will guide you to achieve all your goals effectively.
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