People are getting more health-conscious nowadays. Their growing expenditures on gym memberships, fitness equipment, health supplements, organic foods, etc. are testament to this fact. Surely, it’s not difficult for you to find health-conscious colleagues and friends around you. While people are concerned about their physical health, they don’t really pay much attention to their financial health. Most people don’t have the habit of conducting regular financial health checks for themselves. They simply don't care, or don’t really know how to and where to start.
My friend Joshua Yeary from America has developed an excellent scoring method known as the Personal Finance (PF) Score, which helps to determine a person's financial fitness level. To calculate your PF score, you'll need to establish your net worth and your yearly expenses. Taking your net worth and dividing it by your annual expenses, you’ll get your PF score (PF Score = Net Worth ÷ Annual Expenses).
After getting your PF score, check your financial health status using the following score guide:
<0 = You have a negative net worth and need to get out of debt NOW!
1 = Nice Work! You’ve successfully saved up one year’s worth of expenses.
5 = You’re starting to pick up steam, keep up the good work.
0 = The ball is really rolling now. Your money is getting behind you every step of the way.
25 = Congratulations, you are now financially independent! You can now withdraw 4% annually from your investment, without ever touching the principal, to cover all of your expenses. You no longer have to work for money.
30 = Your investments are now out-earning your spending and continuing to grow. You could be building up a legacy to pass down to future generations.
>30 = You are long past worrying about money.
Now you have it - the new score that provides a good assessment of your current financial health. Not only must you take good care of your physical health, it is equally important to look after your financial health as well.
My financial health used to be very bad even though I have no problem with my physical health. I had huge consumer debts that contributed to a negative net worth and my PF score would have been less than zero at that time. After going through many years of financial workouts (learning and practicing good money habits, eliminating debts, saving money to invest in assets, etc.) to improve my financial fitness, my PF score now stands very healthy at 56. If I can do it despite being in poor financial health before, so can anyone who is determined to restore optimal financial health.
How does your PF score look today? Remember, whatever your score is, start taking immediate action to improve your financial fitness. Don’t despair if you have a low or even negative PF score now. I’m sure you’ll see your score improving over time with your persistent financial workouts.
Do You Know Your Net Worth?
The Real Meaning of Financial Freedom
Assets and Liabilities - Do You Really Know the Difference?
Kelvin Wong is a millionaire investor, author, and landlord in 3 countries. He currently owns a multi-million dollar property portfolio in Singapore, Australia and Malaysia. With his assets generating multiple streams of income to sustain his desired lifestyle, Kelvin became financially free at 39. He holds a Bachelor of Business (Dean's List) degree and a Diploma in Business Management. Kelvin writes about building wealth and achieving financial freedom in his free time.
Copyright © 2011 Kelvin Wong
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