By Tkay Nthebe
A financial health check is an assessment of our finances where we calculate and determine our financial health status such as “how much are we saving and/or how much goes towards paying off financial obligations”. Financial fitness might like feel like a far-fetched dream for many, because people describe their relationship with money as “toxic, anxious, unhealthy and stressful”. The reason we are so anxious and stressed about money is because we do not pay attention to our numbers and financial health status.
The truth is the numbers DO NOT lie! It is therefore important to confront them head on because once we know and understand the numbers, we are able to make the necessary changes and correct the mistakes we’ve made. In this article, I will focus on two calculations and demonstrate their relationship to start us off on our journey of doing a financial health check.
- Savings ratio
A savings ratio helps us to determine how much of our net income we are putting away every month and gives us comfort to explore life with options. The more we save, the better prepared we are for rainy days such as emergencies, capital to start a side hustle or sustain us in case of job losses. Using an example below, let us calculate a savings ratio for Thabo who earns a monthly income of M3, 500.00 and saves M300.00 monthly. Looking at his monthly savings ratio of 8.57%, Thabo is doing well but is below the recommended ratio of 15%. To increase his savings ratio, Thabo can gradually increase his monthly savings when he gets a salary increase, start a side hustle or reduce his monthly expenses.
- Debt service ratio
Are you thinking of taking out more debt? The debt service ratio helps us understand the impact of increasing debt levels or determine if we will still be able to make our monthly debt payments should we take a salary cut or lose our income. Nthabiseng makes a monthly payment of M1,500.00 towards a personal loan and earns a monthly net income of M6,000.00. Should Nthabiseng take on more debt and increase her debt ratio beyond the recommended maximum of 35%, she may struggle to make her monthly debt repayments should things change in her life. To reduce her dependency on debt, Nthabiseng can consider using her savings or income from her side hustle to complete projects instead.
Alternatively, she may choose to give up something that she can do without, and be able to have some extra money. E.g. Annual gym membership – M1, 500. She can decide to start running outside, or join a sporting team. That way, she saves money, but still maintains her fitness goals. Ask yourself, what can I do without, that is currently affecting my budgets?
Being a big advocate for holistic wellness, it fascinates me to see ordinary Basotho taking care of their physical wellness by going running, doing virtual home workouts and going for medical check-ups to ensure that our vitals are O.K. In a similar fashion, let us normalise doing a financial health check and knowing our financial health status! When we know our financial health status, the anxiety and stress that we experience every month end will become a thing of the past; allowing us to do the important things. Take that first step, start with the little you have and ensure you are financially healthy.