Why you need a Financial Physical, and how to do it
Updated: Jul 27
As you get older, it's good to know your some data about your health. How's your cholesterol? What's your blood pressure? Is your BMI troubling? Do you need to change your lifestyle or take medicine to remedy any significant problems? This is even more crucial in the time of Corona so we can make sure we don’t have any of the ever expanding list of COVID 19 symptoms. Finance is no difference.
So, call me Dr. Zach today, because I'm going to show you how to give yourself a financial physical. I don't even need a rubber glove! I can't promise it will be painless, but I can promise that it will help you check in with the honest state of your finances and then point the way to solutions.
As I said in my previous article, Net Worth (your assets-your liabilities) is the most important number for you to track. It allows you to see if you are doing the right things to achieve your long term financial goals, and it's pretty simple to calculate (unless you are a real estate mogul, in which case, you probably already know how to do it).
There are also two other key numbers that you should know, one is a bit easier than the other, so let's start there. Your Emergency Fund. An emergency fund is cash you have set aside in case there is an emergency like a job loss, health problem, car breakdown, etc that you can't really plan for. Many people recommend 3-6 months of your expenses, depending on how quickly you can get a job and what amount of cash makes you sleep better at night. If you can, put it in a high yield savings account so that this money is safe, but making you some money. In financially uncertain times like right now, it may be better to have a larger emergency fund just in case. Like I said before, I’m feeling comfortable with a 1-3 year cash net right now. If things get better, I can always invest the difference and get down to a smaller amount.
The next number is a little harder to figure out, unless you track your spending, which you totally should. It's your savings rate. Your savings rate is simply the amount of money you save as a percentage of your income. Say you make 20,000 AED a month, and you manage to save 5,000. Your savings rate is 25%. The higher your savings rate, the quicker you will fill your Emergency Fund, save for retirement, and become financially independent.
The other two things you need to figure out aren't necessarily financial, per say, but they do have enormous impact on your life in financial and happiness ways.
The first is how much time your job takes. This, of course, includes the hours you are actually at work, but it's more than that as well. How long do you spend getting to and from work? How long every day do you need to de-stress from work? How much time at home do you spend thinking about your job? Are you happy with this number? If you're not, what are ways you can fix it? Living closer to work? A different job? Meditation? If you want to figure out how much you make, per hour, you need to take this into consideration, or else you're not getting an accurate picture of your hourly wage.
The last key aspect to consider is the physical impact of your job. Are you sedentary, sitting in an office chair all day? Are you working construction and carrying heavy loads all day (lift with your legs!). Are you constantly stressed out, with elevated cortisol levels that will give you heart attacks, strokes, and insomnia? Are you letting your job shorten your life? Do you need to drink after a hard day or do other things that are harmful just so you don't have to think about work and can interact normally with your family?
Just like someone's physical health can't be summed up in just one statistic, your financial health is a puzzle put together of many pieces. These are key ones that will help you make better financial decisions. For example, if your savings rate is really low, you can start to look at ways to cut back on spending or increase your income. If you're spending so much time at work or thinking about work that your relationships suffer, you need to figure out ways to bring balance there. If you have gradually gained a lot of weight because of a job where you sit for 6-8 hours a day, you need to think about whether your job is worth the consequences of obesity, which can be severe.
I can't tell you what the right number is for any of these categories. You need to think that through on your own. Everyone has different goals and fears. But until you know the information, and deal with it in an honest manner, you can't make informed decisions that help guide your life to where you want it to be. The good news is, you don't have to turn your head and cough!
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