Ok, hopefully by now you have some high level financial goals in mind, along with an understanding of your current financial position. Now its time to pull these together & evaluate where you are in the context of where you'd like to get to:
Step 5) Evaluate your current position
Contrary to what financial advisers will tell you, i really don't think you need to be (or pay for) a financial adviser to do this. The following points are some things that may be worth considering in assessing how you are doing, turning basic financial information into something a bit more meaningful:
This is generally defined as assets minus liabilities, ie how much you are worth at any point in time. This can also be projected forward by adding on the difference between your income & expenses.
Lets say your assets are 2000 and your liabilities are 500. This would result in a net worth of 1500. Now lets say monthly income less average expenses results in savings of 100. Over a year you'd save around 1200, suggesting your net worth in a year's time may be around 2700.
This is particularly useful to understand if one of your goals is to save a certain amount over a set period of time.
There are different ways of defining this, but my preferred approach is to think about how much you save each month (after putting aside a tax accrual) as a proportion of total income. This will become a useful tool to measure the pace at which you expect to grow net worth, and can also be used in setting personal targets to achieve certain goals.
This is the proportion of your assets held in each asset category. This can be as detailed as you like, but i tend to focus on 4 broad categories, being Cash (bank accounts), Pension schemes, Property and other Investments (eg shares).
This is important to understand as it determines the relative riskiness or volatility of your wealth - we'll come back to this point at a later stage. It can also be used to assess the level of income/growth your assets may generate through interest, dividends, capital growth or rent.
Take the value of all your readily available cash balances and divide it by your typical monthly expenses. This will give an idea of how many months worth of cash are available for emergencies, for example if you lose your job or get hit with any large unexpected expenses. I consider this an important metric in understanding short term financial security, and it may be one of your goals to maintain a cash buffer of a certain size, depending on your individual appetite for risk.
There are many other things you could look at, but i consider these to be a good starting point in evaluating your current financial position. They can also be used as metrics or KPIs to assess progress towards goals or for setting specific targets.
Now we have all this information it is possible to start monitoring and making some decisions...