If yes, how will you know about it before you run out of time? Similar to economic indicators of a country that can tell if economy is doing well or not, you can draw up these four financial statements to know about your finances.
a) Income & Expenses Statement
b) Cash Flow Statement
c) Family Budget
d) Net Worth Statement
(In later write-ups I will explain each one of them in detail. Advanced Financial Planning also employs ratio analysis techniques to monitor financial health.)
Income and Expense Statement, prepared usually for a period of one financial year or plan year, can tell you whether your income is sufficient to meet your expenses. If you end up with surplus, it indicates that you are on the right track.
Sometimes, Income & Expense Statement can be deceiving because it does not measure the cash flow. A cash flow statement measures the actual cash you receive and give away during the same financial year.
Just to highlight few differences between Income & Expense Statement and Cash Flow Statement, your income and expense statement may include performance bonus that you may not actually receive. It may also include accrued interest on which tax needs to be paid. Your cash flow statement may show the amount returned by your friend who had borrowed at some immemorial time. It may also include the mutual fund redemptions you are likely to make in the financial year.
Family Budget will tell you if you have enough rupees to spend each month of the financial year.
Net Worth Statement (or Balance Sheet) provides pointers to the long term health of your finances. It shows how much you own and how much you owe.
Some of the financial stress indicators are:
- You have more than one credit card and each has some unpaid balances.
- You use credit card more often than debit card.
- You are spending all your earnings or more than your earnings.
- You use credit card borrowings to balance your family budget.
- You are often in the habit of borrowing from your parents and friends with reasons such as “I am running short of cash” or “I will square up in my next month’s salary”.
- You are using ‘revolving credit facility’ or ‘convert to easy EMI facility’ in your credit cards.
- You have more than one personal loan borrowed for purchase of things that lose value once you buy them.
Following situation may indicate that you are under severe financial stress and may need immediate attention and help:
- You are defaulting on your minimum payments of your credit cards or EMIs, for several months in a row now.
- Banking and Financial institutions are unwilling to lend you anymore.
- You are borrowing at very high costs just to repay either the old loans or the minimum payments or just the interest.
- You are stopping your on-going saving and investment plans and/or also redeeming the investments beforehand.
- You are pledging your existing financial assets such as fixed deposits or cash value insurance policies to pay interests.
- You have unpaid term and health insurance premiums.
Surprisingly (or unsurprisingly), financial stress has nothing to do with your personal status. If you are a bad money manager, it can affect you even if you are responsible for millions of rupees of revenue for your employer and you head a large team of people. It can affect you whether you are a business person or professional or salaried employee. It can affect you at any stage of your life if you have not learnt the lessons and haven’t inculcated prudent financial habits. It can affect your household even if both spouses are drawing million rupee salaries each.
Prevention is better than cure. If your doctor says that you must walk every day for at least 30 minutes, do not ignore the advice. It may save you from lot of troubles in future. Similarly, if you are under financial stress, mildly or especially severely, do not hesitate to talk to your elders and/or professional advisers and listen carefully to what they have to say. You should also speak to your spouse openly and honestly because he or she has to stand by you in the difficult times. You can also talk to your tweens truthfully and involve them in the recovery plan. Talk to your friends only if they are dependable. It may not help you much if they have also played a role in the first instance or if they are in bad shape themselves.
It may surprise you, but just the same, the old adage of stretching your legs to the length of your bed is the advice you will receive from all your well-wishers including your financial planner.
