by Sanjeev Kumar Gopalakrishnan, Financial Planning
09 Oct , 2017

How to diagnose your financial health?

What do we do when we have some symptoms like dizziness or headache? We consult a doctor who in turn asks us to do certain tests like blood test which will tell if our body has high cholesterol or sugar level.  Most of the lab reports will show the level of a particular thing like sugar in our blood and against that, it will show up to what level it can be considered normal. And based on the report doctor prescribes us the right solutions.

Similarly, when it comes to our personal finances, sometimes we get certain symptoms of financial ill-health. It may be postponing some loan repayments or insurance premium payments; or the credit card balances might have shot up. In such a case, it is time to do a diagnosis of our financial health.

Financial Health and Diagnosis

First step is to organize your financial information. Write down the details of your income from various sources over a year. Usually people think about only those incomes which they receive regularly and are higher. But you should also take into account, small and in-frequent income. For example, income from the sale of coconuts from 6 or 7 trees.

Next step is to write all the expenses which are regular, one time or happens periodically over a year. These will include your household expenses, travelling expenses, school fees and other costs, salary for maids, clothes and other accessories, vehicle expenses, personal expenses and all kind of expenses except insurance premiums, EMIs and chit payments.

Ideally, your total expenses should not be more than 35% of your income.  If your expenses are between 35% to 45% of your income then you should start monitoring your spending and make sure that your discretionary spending is minimized. If the expenses are more than 45% of your income you should consider methods to bring it down to desired levels.

Next, write down your loan repayments. These will include home loans, auto loans, education loans, consumer loans, gold loans, personal loans and chit installments if chit money is received. All your loan repayments put together should not be more than 35% of the income ideally. If it is between 35% to 50% of your income you should avoid taking further loans. If it is more than 50% of your income it may lead you to borrow further to make loan repayments. In that situation you will have to restructure your loans.

There are people who buy a lot of life insurance policies as they consider it as an instrument for savings. The main purpose of life insurance is to cover the financial loss arising due to the sudden demise of an income earner. Considering the need of liquidity and possible returns, it is better to restrict premiums payments to 10% of the total income. By opting for term life cover and other general insurance covers, it is very much possible to do this. If you have total insurance premiums of more than 20% of your total income you may have to consider discontinuing some policies.

Last but not the least, monitor your savings. You need money to meet your goals in life like higher education of children, house construction and retirement. You should ideally be saving about 35% of your income. In case you have taken a home loan then you should at least save about 25% of your total income. In case your expenses are high or loan repayments are high, your savings potential will be hugely impacted.

By reallocating your cash and investments for various purposes, you will able to lead a healthy financial life. The first step towards that is to understand your cash flows and take necessary steps to restructure them where it is needed.

There are several sites offering financial health checkup when you search in Google. But they usually give subjective analysis based on a few questions without analyzing all facets of your financials properly. It is like telling you that you have diabetes by just asking a few questions about your food habits. If you need more accurate information, try out our free financial diagnosis. PrognoAdvisor analyses your financial data thread bare and gives an accurate picture of your financial health. 

Get a free Financial Diagnosis now!

 About The Author

Sanjeev Kumar G, an IBS Chennai Alumni, is a Certified Financial Planner (CFP) from India, since 2005. He has 22 years of experience and is an expert in various personal finance areas like portfolio construction, investment research, life insurance and financial planning.


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