Personal Finance Series Part 1: Assessing Your Financial Health – Blog Post 0002

“The budget is not just a collection of numbers, but an expression of our values and aspirations.” - Jacob Lew


There is No Financial Magic Bullet

Just like health education and advice, financial education and advice need to be individually tailored because everyone's situation is different. Age, marital status, kids, life priorities, risk tolerance, net worth, career prospects and many other factors play a role in determining what's best for you. There is no single magic bullet or allocation that covers all situations. It is also important to understand that financial planning is a dynamic process and should change to accommodate your current life situation.

Learn to Crawl Before You Invest

People regularly ask me for stock tips or investing advice and I usually refrain from giving them an answer for one good reason: I don't know what their financial health is. And when I ask them, they usually don't know either! If you take nothing else away from this post, remember this: YOU CAN'T PLAN FOR THE FUTURE IF YOU DON'T KNOW THE PRESENT.

Assessing Financial Health

What does financial health mean? Financial health is simply the state of your finances as determined by your current assets, debts and income streams. Put plainly, it's what you OWN (assets), what you OWE (debts/liabilities) and what you MAKE (income). A simple but incomplete proxy for your financial health is your financial net worth. A simplified net worth calculation is:


Your financial net worth and your current/future income prospects should be the factors that determine how you allocate your money. Below are three general scenarios that can determine how you allocate your present and future income:

Scenario 1: If you have any debt with an Annual Percentage Interest Rate (APR) of 8.00% or more, YOU SHOULD NOT INVEST! You should use current savings and income (except for your emergency fund) to pay off those debts as quickly a possible. High-interest debt will generally cost you more than what you can earn by investing. If you earn $100 but have to pay $150 in interest, you will quickly spiral further into debt.

Scenario 2: If you have too much debt compared to your assets, and your net worth is negative, consider putting most of your disposable income (income after expenses) towards paying off your debt and a small portion towards investments.

Scenario 3: If you have a significant amount of disposable income, your debt/loans have a low APR (less than 7.00%), and your assets are greater than your debt, you are in good shape to start investing.

DISCLAIMER 1: Do not invest money that you might need for an emergency or other unanticipated expense. Always maintain an “Emergency Fund” that can be used during emergencies. This amount will depend on your monthly expenses but should equal to at least three months worth of your expenses.

Improving Financial Health

There are basically three ways to improve your financial health and doing all three together will get you healthier faster:

  1. Increase Your Income - work more hours; acquire a new skill-set that will increase your hourly pay or yearly salary; put your money to work through investing
  2. Reduce Your Debt - pay off high interest credit cards and loans; don't take on any new debt
  3. Reduce Your Spending - reduce needless consumption; remember that almost everything you purchase for personal consumption will drop in value over time

Tracking Finances and Calculating Net Worth

The best way to keep track of your accounts, income, expenses and assets is to create a spreadsheet document and update it on a quarterly basis (every three months). When everything is in one place, it is easier to get a full picture of your finances. You can also easily derive your net worth from this document with a simple formula.

I recommend OpenOffice because it is free. If you would like a financial planner spreadsheet template, contact me and I will send you an up-to-date version. Below is a sample of a simple financial planning document.

Sample Budget using OpenOffice


This concludes the first part of my Personal Finance Series. With the information provided above, you should be able to get a better idea of your current financial health, calculate your net worth and decide if you are in a position to invest or if you need to improve your financial health first.

As I stated in the opening paragraph, everyone's situation is different and some of the information presented might not apply to your specific situation. If you would like a more personalized financial plan, feel free to contact me for more information.

Lastly, I would love to hear your feedback. If you found anything confusing or need further clarification, please let me know in the comments section below.

DISCLAIMER 2: I am NOT a financial advisor and more importantly, I am NOT YOUR financial advisor. The materials/information presented in this blog are for informational purposes only. Decisions based on information contained on this site are the sole responsibility of the user, and in exchange for using this site, you agree that neither Boris Mozer nor his affiliates will be liable against any claims for damages arising from any decision you make based on such information.


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