1.0Self Assessment and Measuring Financial Health.
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Transcript of 1.0Self Assessment and Measuring Financial Health.
1.1 Self Assessment
Prior to addressing one’s personal finances, an honest and diligent attempt must be made to ascertain one’s general financial standing. In accordance to a study* of 924 college students in relation to their personal financial literacy, the following was revealed:
Level of Personal Finance Knowledge
General Knowledge Low MediumHigh
Personal Finance Literacy80.95
Legal Requirements for Apartment Lease 75.11
Apartment Leasing Costs 74.03
Asset Liquidity 73.48
Spending vs. Saving Pattern 70.89
Checking Account Reconciliation 62.55
Net Worth Calculation 56.49
Personal Financial Planning 52.38
Tax Credit vs. Tax Deduction 27.38
Total Average Correct Responses 63.70
1.1 Self Assessment
There are 4 areas of Self Assessment
Financial Literacy – relates to one’s general understanding of financial terminology and financial concepts and principles
Background from the Home – The household has a strong impact on an individual’s perception on spending and saving
Inhibitors to Success – These are physical or mental obstacles to the progress of the individual. They can either be real barriers such as inexperience, lack of skill or physical disability. Or they can be imagined, such as fear.
Habitual Financial Behavior – Involves the normal daily financial activities that an individual engages in.
1.2 Measuring Financial Health Failure to Plan
Overspending
Credit Purchases
Delayed Retirement Saving
Emotional Spending
Inadequate Research
Exposure to Catastrophic risk
Over-emphasis on money
Financial health in short is the relationship between an individual’s revenues and expenditures. The higher the ratio of revenues to expenses the more sound the financial health will be. There are several conditions that negatively impact financial health.
1.3 Financial Net Worth
Financial Net Worth is defined as an individual’s total financial assets less the individual’s total financial liabilities. It is the most important measure of financial health and indicates the capacity to accomplish major financial goals.
Total Financial Assets – Total Financial Liabilities = Financial Net Worth
Financial Assets – Real money or any investment which can be converted to cash in the near future. Example: the money in a bank account, stocks, bonds, mutual funds, retirement accounts, businesses owned and real estate. Excluded are personal residence and owned consumer items (car. furniture, clothing, etc.)
Financial Liabilities – Include all loans and debts outstanding. Examples include student loans or credit card debt.
Calculating Your Financial Assets
FINANCIAL ASSETS
Account Value
Bank Account Checking RM 5,000
Bank Account Savings RM 16,000
Invested Stock RM 20,00
Invested Mutual Fund RM 4,000
Retirement Account RM 12,000
Real Estate RM 80,000
Total Financial Assets RM 137,000
Calculating Your Financial Liabilities
FINANCIAL LIABILITIES
Account Value
Home Mortgage RM 75,000
Student Loans RM 25,000
Credit Card debt RM 7,000
Personal Loans RM 13,000
Auto loan balance RM 5,000
Total Financial Liabilities
RM 125,000
Calculating Your Financial Net Worth
FINANCIAL Net Worth
Account Value
Financial Assets RM 137,000
Financial Liabilities RM 125,000
Total Financial Net Worth
RM 12,000
1.4 Income and Expenses
Another important measure of an individual’s financial health is a statement of net income.
Total income – Includes all of the cash inflows that an individual receives from the various sources of income (Salary, dividends, rental income, gifts, etc.)
Total Expenses – Includes all of the cash outflows that an individual spends to cover expenditures (Rent, utilities, phone, insurance, etc.)
Calculating Your Total Income
Sources of Income
Value
Salary RM 8,000
Dividends RM 1,000
Gifts RM 500
Bonus RM 2,000
Total Income RM 11,500
Calculating Your Total Expenses
Expenses
Value
Rent RM 1,200
Gas RM 600
Electricity RM 120
Water RM 80
Savings RM 100
Tuition RM 3,200
Health Insurance RM 150
Total Expenses RM 5,450
Calculating Your Net Income
Net Income
Value
Total Income RM 11,500
Total Expenses RM 5,450
Net Income RM 6,050
1.5 Credit Report and Score
A credit report is a documented record of an individual’s credit activity. It contains the following information:
Personal Identifying Information: Name, Address, IC, etc.
Record of Credit Accounts: Account balances, payment history and date of opening account
Bankruptcy filings: Any recent bankruptcy filings recorded
Inquiries: Lists of agencies or organizations that have requested your credit report
1.5 Credit Score and Reports
A credit score is a three-digit score that is derived from an individual’s credit report. It is a prime predictor, according to lenders, of the likelihood one may default on repaying a loan. FICO, a leading US credit rating agency, uses the range of 300 (low) to 850 (high).
1.5 Good Debt vs. Bad Debt
Halal or Haraam?
• The Islamic legality should be looked into before borrowing
• Interest-based borrowing is NOT allowed according to Islamic principles.
Acquiring debt for short-term consumption
• This involves acquiring significant debt for short-term items, such as consumer products, vehicles and vacations.
• This type of borrowing is not preferable and is detrimental to one’s financial health.
Acquiring debt for long-term investment
• This type of borrowing involves acquiring significant debt for long-term items, such as college education or home purchase.
1.6 Debt OverloadKey Points to take note of well dealing
with debt
Debt Overload Ratio = total debt / annual income (should be ideally 10 – 20% of one’s annual income)
Beware of the lure to easy credit
Beware of the effect that debt can have to those around you
Although, good debt is preferable to bad debt, too much good debt is also not a good thing.