Why is Total Financial Health So Important?

Total financial health (4)
Total Financial Health

Have you planned for retirement? Do you know when and how can you achieve it? If you have some plans, do use this total financial health model to validate your plans again. If you do not, understanding this model will help you to set down some goals for retirement.

The total financial health model illustrates the complete summary of your financial status (current and future) and how different elements are very much connected to one another. For most of us, your real estate is the largest asset you have and due to its sheer size, the way you manage it will have significant impact on your total financial health. Hence, total financial health is so important because it is a dashboard to keep all aspects in check and ensures an overall optimal growth.

Let’s start off with some definitions:

  1. Income – sources where you can receive money: Salary, bonuses, business, dividends
  2. Spending on investment – purchase of shares, bonds, deposits, business, real estate
  3. Expenses – spending on non-income generating items: food, entertainment, leisure, groceries.
  4. Assets – valuable items that generate income: real estate, financial portfolio, cash, education, skills, expertise, experience, network
  5. Liabilities – obligation to pay usually arise from the exchange of an asset: mortgage, loans, credit cards
  6. Standard of living – the level of comfort, necessity and wealth you are living up to

Income Generates Commitment and Enjoyment

Arguably, you have two ways to spend your income, either on commitment or on enjoyment.

To spend on commitment, you are setting aside some money committing to save X amount, to have enough money to buy a matrimonial house, to have enough funds to start-up a business and the list goes on. All these funds will one day have the chance to turn into the asset you have been planning for which will then be able to generate income, thus creating a compounding loop. Furthermore, when we are able to harness the power of leveraging wisely, it will help us achieve our goals much earlier at low risk, thus creating a leveraging loop.

To spend on enjoyment, you are spending to keep up to the perceived lifestyle you want for yourself and your family. Most of this cost of living will neither help you generate more income nor create more assets. As you progress in your career, this perceived lifestyle, more often than not, will progress in the same direction proportionately which forces you to spend more. You may start to eat at fine dining restaurants, buy luxury hand bags, watches and clothing etc. Furthermore, as you become a parent yourself, the expenses for your child are inevitable. Notice that there is no loop in this manner of spending your income, the money you spent has just left you and ended up in someone else’s pocket.

Compounding Loop

This is the most important loop in this model. If you are an accountant, this is similar to retained earnings. If you are an electrical engineer, this will make your financial circuit board a closed circuit providing a continuous flow of electricity. This is essentially reinvestment of the income generated from your assets; the more reinvestment you make, the faster you can grow your assets. Note that not all assets generate cash, and one obvious example is the car you bought to be parked at the car park most of the time.

For example, if you bought a flat and rent out one or two rooms, you are using your asset (flat) to generate income (rent). Also, the interest and dividend earned from your deposits and shares are a form of income as well. As a result, these additional incomes will be added to your income stream, hence creating a compounding loop.

Leveraging Loop

By the name implies, this loop created leverages or more commonly known as loans. Such credit facilities allow people to borrow money to buy larger items but only required to repay at a later time period by paying some interest. As long as the interest rate of loan is lesser than the annualized gains in investment, such credit facilities will continue to be appealing, hence creating the leveraging loop.

With the increasing volume of mortgagee sales serving as a stern reminder, this leveraging loop has to be structured hand in hand with the compounding loop to ensure a sustainable growth in your financial health.

Where Do You Stand Now?

Generally, there are four stages for wealth progression, compute the following to see where you stand.

  • Your Total Asset = Principal amount you have paid for your property + shares + bonds + deposits + cash + other assets
  • Your Total Liabilities = Mortgages + car loans + credit line + other liabilities
  • Spending on Investment (monthly) = contribution to your deposits + repayment of mortgages + purchase of investment products + other assets
  • Expenses (monthly) = spending on necessity / wants + recurring bills + insurance premium + other expenses

Once you get the numbers ready, simply compare asset to liabilities and spending on investment to expenses with reference to the following table. Note that the class you belong to is not determined by the absolute amount you have, but rather the ratio of how you are allocating your money.

4 Stages of wealth progress (1)
Four Stages of Wealth Progression

In order to put this wealth progression into perspective, let me use an example of a young newlywed couple, see the following table.

4 Stages of wealth progress Example
The Journery of a Young Newlywed Couple in the Four Stages of Wealth Progression

What’s Next?

If life is a game of chess, our property is just like the Queen, it is the most powerful asset that could undoubtedly provide you the unfair advantage to win the game when it is used correctly. Whether you are a salaried employee or running your own business, as long as you own a property (or going to), you will need to play this game well. No matter which stage are you at now, if you are able to strategically move your Queen, there will be plenty of opportunities available for you to win the chess game.

Do not wait any longer, the best time you should start playing this chess the right way was yesterday. Let me help you out, contact me for a free consultation today!

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