Let's Have a Check Up!

We do need to check up our health regularly in order to detect any disease symptoms before it's going even worse. It is always better to know earlier whether something is going wrong, so we could do something about it as soon as possible. That is also applied to our financial condition, it is necessary to have a regular check up to ensure that we are financially healthy. So how do you do a financial check up?

Firstly, you need to know how much money you spend monthly or if you don't keep track of your expenses, you could at least make a cash flow budget and try maintaining your monthly expenses so you won't be over budget. I've discussed about how to make a cash flow budget in here and you could also download the cash flow template that I created in here.

You'll see on the cash flow template, I classified the monthly expenses into several categories and we use the categories to define whether we are financially healthy or not. There are 2 main indicators to know how healthy we are, they are saving rate and debt service ratio.

Saving rate is how much saving that you could set aside from the total of your monthly income. Let's say you regularly deposit 5,000 kroner as your monthly savings and if there are leftover money of 1,000 kroner that you don't spend this month then for this current month you have a total of 6,000 kroner savings. Assuming your monthly income is 24,000 kroner then your saving rate would be 25%, which is 6,000 kroner divided by 24,000 kroner. So if you're using the template I provided, you could use the subtotal of saving/installment + monthly cash flow balance (only if the amount is positive) then divide them with the amount of monthly income.

Your financial condition is considered healthy if your saving rate is around 10 - 30%. The more awareness you have towards financial freedom, the larger the number would be, because then you'll have the habit to set aside more money so you could achieve your financial plan sooner. If you are a beginner to this financial planning thing, my recommendation is you set a target how much money that you're willing to save every month and every time you receive your monthly salary, transferred that money to another bank account which you rarely use for daily payments. By separating the money, it prevents you from spending it.

Debt service ratio is the portion of installment that you paid to settle your debt or liabilities from the total of your monthly income. The installments could be arisen if you have a mortgage, lease agreement for buying a vehicle or even for credit cards. For example, you purchase a house with mortgage and it requires you to pay 12,000 kroner monthly to pay off the mortgage, then your debt service ratio would be 50%, which derived from 12,000 kroner divided by 24,000 kroner (your monthly income). This is definitely not healthy! You should maintain the debt service ratio at the maximum of 30%, otherwise you could be burden by the debt and couldn't prepare for your future investment. Even worse you might struggle to pay for the routine expenses.

That's why you should carefully calculate how much debt you can afford before you decided to enter into a credit agreement. I know it is everybody's dream to have their own house but if your income is not enough, it's better to wait for a little while or find a higher paid job before you make a suicidal decision by taking a higher debt service ratio.

I have done the check up for this month and our saving rate is 23% with 0% of debt service ratio. So I guess, we are quite healthy :) How about you? Are you financially healthy enough? Please do share with me if you think you're not healthy financially. Perhaps I could give you some hints how to maintain your monthly expenses in order to have a healthy financial state.

Cheers,
Indispensable Lady