Hi friends! Last week, I completed a class on financial coaching, and there’s a tool I think can help many of you understand your finances better. This tool consists of four key components, giving you a clearer picture of your financial standing and resilience. It’s quite simple and straightforward, and should take about 30 minutes or less to complete.
I’ve prefilled sample values so you can easily see where to replace them with your own numbers.
How-to
- Cash Flow Statement (CF Stmt):
- Purpose: Track your income and expenses to calculate your monthly cash flow.
- Instructions:
- Enter your monthly income in the “Income” section (e.g., salary, bonuses, side income).
- Record your fixed and variable expenses in the “Expenses” section (e.g., rent, utilities, groceries).
- The cash flow section will automatically calculate how much money you have left after expenses or if you’re running a deficit.
- Use this to adjust your spending or saving habits.
- Net Worth Statement (NW Stmt):
- Purpose: Gives an overall picture of your financial standing by calculating your total assets and liabilities.
- Instructions:
- List your assets in the “Assets” section (e.g., cash, investments, real estate, cars).
- Record your liabilities in the “Liabilities” section (e.g., mortgages, credit card debt, loans).
- Your net worth will be automatically calculated by subtracting your liabilities from your assets.
- Use this to monitor changes in your financial position over time.
- Insurance Summary:
- Purpose: Summarise your current insurance coverage and assess if you have enough protection.
- Instructions:
- Input details of your life, health, and critical illness insurance in the relevant sections.
- Make sure to enter the sum assured and any additional benefits like personal accident coverage.
- This will help you see if your insurance is sufficient or if you need more coverage.
- BLR, ECR, DCR (Ratios):
- Purpose: These ratios provide insights into how resilient you are financially.
- Note: The BLR, ECR, and DCR ratios are auto-completed based on the inputs you fill in the Cash Flow Statement, Net Worth Statement, and Insurance Summary tabs, so you don’t have to manually input anything here.
- Description:
- BLR (Basic Liquidity Ratio): This shows how many months you can survive with your cash savings if your income stops.
- ECR (Expense Coverage Ratio): This determines how many years of expenses are covered by your life or critical illness insurance in case of death, total permanent disability, or critical illness.
- DCR (Debt Coverage Ratio): This shows the percentage of your debt that can be covered by insurance in case of an emergency.
FAQs (Frequently Asked Questions)
- How do I know what numbers to enter for my insurance coverage?
- Ask me, or check your insurance policy documents for the sum assured for life, critical illness, and personal accident.
- Why is my BLR showing a very low number of months?
- This could indicate that your expenses are too high relative to your savings. Consider cutting unnecessary expenses or building an emergency fund to increase this number.
- What do I do if my net worth is negative?
- A negative net worth means your liabilities exceed your assets. It’s important to focus on paying down high-interest debts like credit cards or personal loans while building assets through savings and investments.
- Why are my insurance ratios showing I’m under-insured?
- If your insurance coverage isn’t sufficient to cover your debts or long-term expenses, you might need to increase your life or critical illness insurance.
- What if my expenses change month-to-month?
- For variable expenses, try to average them over the last few months. This will give you a more accurate view of your typical monthly outflow.
- How often should I update this tool?
- It’s best to update your cash flow statement and insurance summary at least once every six months or whenever there’s a major financial change (e.g., a new job, significant debt, or insurance updates).
- How do I use the DCR (Debt Coverage Ratio) if I don’t have insurance for my debts?
- You need insurance. Call me.
Feel free to download the file and let me know if you have any questions or need further guidance.