You open Google Maps, you enter a destination and Google Maps says “Cannot find current location”. Do you think Google Maps will be able to take you to your destination? I am guessing not. So the first step in managing your personal finances is knowing where you are. This means knowing your assets, liabilities, income and expenses. Like every company does you need to make a balance sheet as on date and a profit and loss statement for at least the past 12 months to get started.
Now let us assume that Google Maps has your current location but you do not enter any destination. You get my drift. The destination equivalent are your financial goals. Goals must be SMART (Specific, Measurable, Achievable, Relevant, and Time-bound). So “I want to be rich” is vague but “I want to have a net worth of 5 cr by 2036” is a SMART goal.
Once you know where you are and where you want to go, one make a route plan to get there using four basic actions:
- Earn
- Save
- Insure
- Invest
Yes that is all there is to it.
A simple yet effective method to know your “Financial Wellness” is to know how long your money will last without money that needs you to be physically present to earn that money, basically without Active Income
I have an excel which helps you calculate your “Financial Wellness” score which you can download here