There is the popular saying that “If one fails to plan, one plans to fail”. A lot of people know that already, but the culture of evaluating one’s current and future financial state to aid judicious financial decision-making remains lacking among many.
The problem is simple; people simply do not know what their current financial state is, and as a result, they do not see the need to imbibe the habit of planning their finance.
However, there is a quick way to determine how financially fit you are.
Afrinvest, a Lagos-based financial house, developed a calculator which has been adapted, to help gauge financial health and determine whether a person needs a financial plan.
The calculator involves a list of important criteria against which one rates his or her performance on a scale ranking zero to a limit based on the weight assigned to such criterion.
Zero implies the individual has not achieved such a goal while a higher score shows the extent to which such target has been met. Some questions are binary and involve only a maximum and minimum score.
If you answer as honestly as possible, an overall score of less than 50 implies an urgent need for you to create a financial plan. Good luck with the test!
- Spend less than you earn (0-10pts)
The first question to ask yourself is how much are you able to save every month.
Financial planning involves being able to prepare “the rainy days”; if you are able to put part of your income aside for future consumption then you are well on track-well, another perspective is what proportion of your income is being saved. The more the merrier? Perhaps so, if your current consumption allows it.
The action point here is to rate yourself from zero-ten on how well you are able to spend below your income on the average, every month.
- Have a pension account (Binary: 0 or 10pts)
You are not going to work forever! This makes setting up a pension account very important. Your pension would enable you to maintain a reasonable standard of living when you retire.
A high five wouldn’t do justice if you already have a pension account. Given the importance of owning one, it is ten points- and zero if you don’t have a pension account.
- Saved up to 3 months of expenses (0-15pts)
Think of your savings as a reserve, do you have up to three months of firepower should an unexpected event-like the loss of a job-occur?
It is easier to say “God forbids it” but job losses and companies downsizing are inevitable events when there is an economic downturn or a global financial crisis. The chances of such events might be unlikely in the near-midterm but it shows how events beyond our control can make us vulnerable.
Depending on how much your savings can account for three months’ worth of expenses, you can assign a score from zero to fifteen.
- Have Investments in Naira (0-20pts)
How much investment (in Naira) do you have? Whether in fixed income, equities, real estate or alternative investment and assets classes, investment is pertinent to your financial fitness.
Since cash erodes value while financial assets earn a return and preserve wealth, this criterion has the most weight. BusinessDay believes the size of the investment matters and suggests 0-5 for having any investment under N1million, 5-10 for investments between N1million and N10million, and 15-20 for investments more than N10 million.
- Have investments in Dollars (Binary: 0 or 5pts)
Imagine having had investments dominated in US Dollars before the 2016 oil price crisis and naira’s devaluation. Having investments in Dollars act a safety net and is important to your overall financial soundness.
- Have any insurance-Car, health, life, house (0-5pts)
Insurance is a guarantee that in the events of a mishap one is restored to one’s prior state. This makes insurance an important consideration in assessing your financial health.
There are four very important policies an individual should consider. If you have any insurance policy you can assign yourself two marks, then additional one mark for extra policies you hold.
- Have a supporting source of income (0-20pts)
Are you solely dependent on one source of income? That should be a downer! Getting extra sources of income is a great way of diversifying the risk of shock to income when there is an unexpected change to employment situation or business slows.
If you have more than just one source of income, rank yourself from one to ten, depending on how much earnings compared to your mainstream job or business is realised from the side job. For more than one supplementary income source, the rating should start from 10.
- Completely debt free (Binary: 0 or 5pts)
Debt is not necessarily a bad thing. Even the world’s wealthiest 1 percent is not absolutely debt free.
The ability to keep debt under reins and to live absolutely debt-free, therefore, is a rare art that might speak volume of one’s ability to manage expenses and live within means. If you are in the debt-free club, it is a high five.
