Appraisals: like them or hate them, but you cannot ignore them. At the end of every financial year, you discuss your progress with your boss. What are your strengths and weaknesses? What are your goals for the future, and how can you achieve them? These are some of the general aspects covered during the appraisal. Here’s a thought: how about an annual assessment for your money?
1. Earnings are not just for current expenses
Your commute to and fro from the office daily put in the work, and at the end of the month, you receive compensation for your efforts. You can use this income any way you wish. You may use it to meet expenses like groceries, bills, house rent, and other miscellaneous costs like eating out, watching movies in theatres, hanging out with friends and family, etc. But at the end of the day, your monthly income is not just meant for your current expenses. It is also necessary to help you meet your future financial goals and aspirations. The amount you save today can be beneficial for you in the future.
2. Why an assessment is important
An assessment means taking stock of your finances and understanding where you stand concerning your money. It is a way of discovering whether your earnings can help you meet your financial needs today, five years later, and also 20 or 30 years later. This also enables you to determine whether you are doing your financial planning in the right way or not.
3. What’s your current financial situation?
An assessment breaks down your finances into straightforward terms:
- How much do you earn?
- What are your expenses?
- How much are you saving each month?
- Do you have any outstanding debts?
The answers to these questions give you a realistic idea of your financial situation. For example, if your monthly expenses exceed your earnings, you are living beyond your means. This can become a problem sooner or later when your savings get exhausted.
4. How to assess your money?
There are three important areas to examine when you wish to do an assessment.
- Short-term goals
- Long-term goals
Emergencies: Everyone lives with the hope and belief that everything goes on fine and nothing bad happens. However, life is unpredictable, and you need to be financially prepared for any adverse situations as a responsible individual. In case of an emergency or a market meltdown, do you have enough savings to last at least six months?
- Yes, the money is in a liquid fund: Good job!
- Yes, I have saved partially: try reaching the goal through investments in a liquid fund.
- No, I don’t have any emergency savings: start saving right now.
Short-term goals: Do you see any large expenses coming up in the next few years? If so, what’s your financial plan to meet these goals?
- Yes, I regularly invest in debt funds: Good job!
- Yes, I have some savings in my bank account: consider switching to debt funds for better returns.
- No, I don’t have any savings for my future goals: Start investing now to reach your goals.
Long-term goals: Going on a world tour with your entire family, funding your child’s college education, and retirement planning are a few examples of large expenses that come your way in the distant future. Is a portion of your money working towards these goals at present?
- Yes, I invest in equity mutual funds and stocks: Good job!
- Yes, I invest in a fixed deposit: Investment in equities is a better way to finance long-term goals.
- No, I don’t have any savings: start saving in equity funds to fulfill your long-term goals.
If you score a three on all the factors, you are on the right path. However, if you find yourself lacking in any of the different aspects, it is best to take the necessary steps to ensure that you create adequate savings for the future.