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3 Vital Signs That Determine Your Financial Independence

Financial Independence

According to a report published in The Guardian, the devastating bushfires that caused colossal loss on the Australian’s eastern seaboard, along with the scare of coronavirus turning into a global epidemic will have a detrimental impact on country’s economy.

The situation may seem grim, however if your business is equipped with clear metrics towards financial independence, making better and well-informed decisions can help you to ride through the rough markets!

Know the Vital Signs to Monitor Your Financial Health

In an effort to keep a check on our physical health, we step on the scale and use advanced apps to track our daily calorie use. Similarly, checking on financial vital signs is a quick and simple way to monitor your overall monetary well-being and ensures you are in a better position to lead a successful business.

With your finances sorted and formed on solid ground, you can stay calm and focused even when the market conditions are pessimistic and turbulent.

Here are a few crucial metrics that will help you have a ceiling view at your financial position and determine its overall conditions.

  • Determine Your Net Worth

Compared to other metrics, this one is much simpler. With an easy formula you can calculate your net worth – Add the total market value of everything you own, and then deduct the total of everything you owe. The result, even a negative number, is the net worth! Watching and observing the fluctuations in these numbers will give a crystal clear perspective about where exactly your finances are moving – forward or backward?

Over years of working as financial advisors, we have seen many people shying away from taking a look at their net worth. Looking at your debts can overwhelm you, but this gives you an indication of your current financial independence. If debts exceed your assets, achieving monetary control may remain a distinct dream!

It’s fine if your net worth is on the other side of zero as all debts are not bad. However, to become financially self-reliant, your assets need generate sufficient income to comfortably cover your cost of living.

 

  • Debt: Income

The debt/income ratio is a metric that gives an idea how much debt load is weighing you down, however, unlike net worth the debt/income ratio measures your monthly debts against your income sources. To determine your DTI, total up the monthly debt payments including mortgage, personal loans, credit cards and divide them by your pre-taxed monthly income.  There are numerous schools of thought about what is called a “good DTI”, however many professionals agree that anything below 36% is a good DTI.

The debt/income ratio can affect your creditworthy quotient and can have a large impact on the cost of borrowing money. The higher the DTI, the higher borrowing interest rates – this can pull you into the vicious cycle of never-ending debts.

 

  • Calculate the Months of Financial Freedom

What if you take a sabbatical for a while or your business is going through a slack time, how long could you maintain your present lifestyle without withdrawing funds from your long term investments? To get an answer to this question, divide your total liquid savings by your total monthly expenditure. The result will be a number of months you can survive without getting a paycheck and before it starts to affect your day to day life.

The “safety months” metrics indicate how long you can afford to spend finding a new job, in case that ever happens. Having several safety months stored up can offer you peace of mind and give you ample time to get into the driver’s seat of your life and work.

If you have any queries or want to know more, give us a ring on 0402895593 or email us on pallavi@sfadvisory.com.au.

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