Financial Health: Are we healthy? How do we measure it?
There are many ways to measure our financial health. Here are just 5 ways to measure it. Perhaps some of us are already way above all the measurements. That’s good news. Just remember that EPF is extra savings. It should not be the only or we will definitely not be financially healthy.
#1 Emergency Funds Availability
How many months of emergency fund do we have currently? Before the Covid-19 pandemic arrived, the typical yardstick is 6 months. I think more financial consultants would now say it’s 12 months instead. A good friend who’s already a big boss said, 24 months would be better. Personally, I think a minimum of 6 months is a must and this is 6 x our current monthly income.
Briefly, it’s how long could we last if we lost our job today. If we have 6 months worth of liquid financial resources, then we have achieved the minimum. If we have 12 months, then we should feel safer as we have enough time to look for another job or even to wait for things to get better and we could get back a similar job. If we have 24 months or higher, then yes, I do think we are financially healthy.
#2 Steady income flow?
Before we could have sufficient emergency funds, we need a steady income flow. Do we get our salary on time every month? Please note that if the company could not even pay us our salary on time every month, what is the chance that they can survive any unforeseen circumstances?
Do we get increment / bonus every year? If we did not and it’s because of us, we need self-reflection on whether we are doing good enough at our current role. Increment is for future performance. Bonus is for past performance. So, usually if we performed sufficiently, then we should get both.
If we did not get bonus because the company was not doing well, then it is better to join a company which is doing better in their business.
#3 Expenses in Check?
Do we strive to earn more and then we spend more? Many years ago, a good friend’s husband was driving a Segment B sedan and then he changed to a Segment C SUV. My good friend said that her husband got a promotion, so he bought a new car. However, they could NOT afford anything more expensive because of the salary. This meant that if his salary was higher, then they would buy a more expensive car instead.
When we earn more, we need to save more. When we save more, we will have more funds to invest. However, if we earn more and we spend all the extra earnings, then our expenses are no longer in check. In fact, with a credit card, we may easily overspend too. Question, do we pay our credit card bills in full every month?
Furthermore, there are now so many Buy Now Play Later (BNPL) schemes that we thought we could afford the item when we actually could not. An easy way to check? If we need instalment plans for a RM1,000 item, forget buying that item for now. We just could not afford it and does not need it until we actually have the money to buy it.
#4 Our Cash Balance is ACTUALLY growing
If we have RM5,000 in the bank 5 years ago and we still have RM5,000 in the bank today… then we are not looking healthy in terms of financial health.
If we have RM5,000 in some unit trust investment 5 years ago and we still have exact same amount today, then we have no moved at all in terms of better financial health.
It’s thus easy to see if we are becoming more positive year after year when we look at our cash balance. If it is growing, then we are doing better with every passing year. Just need to remember though that the growth should be a meaningful one.
Let’s be realistic, saving an extra RM1,000 per year is definitely not going to be enough when we need the money after retirement days. A good benchmark would be to grow by around 20-25% of our earnings every year. If we earn RM100,000 per year, then we should be growing our cash balance by RM20,000 – RM25,000 every year.
Some may say we can look at our EPF savings. I think, we should just let that grow continuously and stop thinking of that as the ONLY source of “cash balance.” Just look at it when we have reached that age to withdraw it. Else, keep growing our cash balance and it will complement whatever we have in EPF.
#5 Are we protected?
If we are hospitalised and the total bill is RM50,000 do we pay with our own funds or do we have insurance coverage / medical card? Just need to note that if we decided not to pay premium and hope to be lucky, then hopefully we are lucky. Else, a hospitalisation of just one week will set us back a year of savings, if not more. This is why we must not be penny wise and pound foolish.
Be savvy and be protected.
#6 Do we own at least ONE Property?
Please skip this if our earnings are so high that we will have no problems in paying rental for 25 years after retirement.
For the majority of us, rental does not stop after we retire. I am telling you this fact as a landlord. I have no intention to tell my tenant to stop paying me rental after they retire. Thus, we better actually own a place so that we could stop paying rental. Example calculation of how much we actually need?
We assume we stop working at 60. Then, we live till 80. That’s 20 years. We also assume the landlord is super nice and does not increase the rental at all. If we rent just a room, than it’s as follow:
RM700 (rental) x 12 (month) x 20 (years) = RM168,000.
If we rent just a small unit instead, then it’s as follows:
RM1,500 (rental) x 12 (month) x 20 (years) = RM360,000.
We can either choose to own a property and actually have extra RM360,000 to go for vacations or spend it all on rental. Choice is ours to make yeah.
These would be the 6 measurements to know where we are in terms of financial health. Yes, we need all 6 and not just one of them. If we are the group looking at F.I.R.E (Financial Independence, Retire Early), then all the above, just need to multiply the speed of achieving them.
No one could foresee unforeseen circumstances. For example, Covid-19. Another earlier example, SARS. No one could predict financial crisis. For example, 1998 ASEAN Financial Crisis or the 2008 Mortgage Crisis. No one could foresee disruptions which may cause them to lose their job. For example, out-sourcing of jobs to cheaper cost countries or even smartphone cameras killing the whole digital camera industry. This is why we need to prepare and financial health is really that first step we need to do.
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