6 Tests to Gauge Your Financial Fitness

By | September 11, 2015


We’ve all taken the online quiz or two (or many many more) and some the results are really worth sharing. Fitness is a big topic of concern for everybody and the internet, hence,  has quizzes for measuring your mental fitness, the fitness of your relationship, your emotional fitness etc.

But, are you financially fit?

Here are 6 tests to check your financial fitness.

  1. What is your income-expense ratio?

The first test to check your financial fitness is to check how much you spend.

  • Expenses should always be lower than your income.
  • Your expenses on EMIs and loan commitments should ideally be less than 40% of your income.
  • Keep an eye on your discretionary expenses compared to your non-discretionary expenses.

It is always advisable to make a budget and stick to it. If you continuously exceed your budget, it is a sign that you should control your spending, as this will eventually reflect in your long term cash flow planning. You must also try to invest atleast 30% of your income before you begin to expend the income. This automatically helps you keep a check on your spending.

  1. What is your net worth?

The net worth of a person reflects their financial standing. The net worth statement is a statement of your assets in excess of your liabilities. It is understandable that at the start of the career, it is not easy to have a high net worth.

However, as you progress in your career, your net worth must keep on increasing over time.

If your net worth in your late 40s is not higher than your 30s, then you’re either accumulating debts in your books or you’re not investing sufficiently in assets. This is a very poor sign of financial fitness.

  1. What is your debt to income ratio?

The ideal debt to income ratio should be less than 40%.

Banks usually calculate various ratios and lend according to their comfort level. However at a personal level, it becomes important for you to keep a check on how much loan you service on a monthly basis as compared to your monthly income levels.

If you find that this ratio exceeds 40% or a maximum of 50%, then it implies that you have more debts on your books than you should ideally have. It also means that your net worth is low and consequently, your capacity to invest also reduces.

Also read: How to manage money when drowning in debts

  1. How good is your investment plan?

Many people make investments without any specific plan or time frame in mind. Although, making investments is a healthy practice, it is more beneficial if this is done keeping in mind the goals of the individual.

The investment strategy is more important than the investment itself. This is because different goals have different timeframes and corpus requirements. This automatically means that the type of investment is also different.

For example, debt instruments are ideal for short term goals, while equity investments are more suitable for long term goals. A good test to check your financial fitness would, therefore, be to evaluate your investment patterns.

You can also read Top 5 tax saving investment plans to plan your financial goals better.

  1. How much you have missed?

You can also test your financial fitness by checking how much you have missed.

This could either be missing to make the right investments at the right time. You could have missed out on earning money in some of your investments, for example, in stock markets. You could have missed investment appreciation by investing in a poor asset. For example, by investing in a real estate property which has not appreciated sufficiently.

  1. What you are doing to protect your wealth?

It is much more difficult to protect money than it is to earn it. As long as you don’t spend it, it is in your possession and becomes a part of your wealth in different forms. But what are you doing to protect it? Have you made sure you are not spending it unnecessarily? Have you done your estate planning? Do you have a will which determines how your wealth should be distributed?

The answers to these questions determine the level of financial fitness.

If you’ve found out that your finances aren’t as fit as you’d like them to be, worry not. You can find out how to get on the financial treadmill by following these 6 steps towards better financial fitness.


YOU MAY ALSO WANT TO: Find out here if your investments are actually suitable to your goals – SIP Calculator

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