Can we measure financial security? This varies from person to person. What is security to one person in terms of amount won’t be for another.
Financial security matters to all but how do we measure it? Here are ways to do it:
- Net Worth. These are our assets minus our liabilities. In the early stages of life, this may be negative because you are paying loads of loans and bills. But as you move forward with life, this may be more positive. It should increase overtime or get less negative. So regularly check the amount and how much it has grown.
- Debt to Income. This is the monthly debt repayments as a percentage of income, the lower the better. This can influence the ability to borrow and negotiate a decent rate.
- Rainy day cover. This is a fund of 3-6 months of spending is what we tend to set aside, in cash, as a reserve. A scenario is, if you lost your job today, how long will you keep going until you need to find another one. This is separate from your lifetime savings. Another important questions to ask is, do I have a crisis insurance?
- Independence ratio. What percentage of your cost of living could you cover from income generated by your assets? The higher it is, the better. The calculation is usually just an estimate.
- Financial stress level. How often do you worry about your financial situation? Is the frequency rising or falling? What are the solutions to change your financial strategy and manage your stress levels?