1.0 Self Assessment and Measuring Financial Health

1.1 Self Assessment

Prior to addressing one’s personal finances, an honest and diligent attempt must be made to ascertain one’s general financial standing. In accordance to a study* of 924 college students in relation to their personal financial literacy, the following was revealed:

Level of Personal Finance Knowledge

General Knowledge Low MediumHigh

Personal Finance Literacy80.95

Legal Requirements for Apartment Lease 75.11

Apartment Leasing Costs 74.03

Asset Liquidity 73.48

Spending vs. Saving Pattern 70.89

Checking Account Reconciliation 62.55

Net Worth Calculation 56.49

Personal Financial Planning 52.38

Tax Credit vs. Tax Deduction 27.38

Total Average Correct Responses 63.70

1.1 Self Assessment

There are 4 areas of Self Assessment

Financial Literacy – relates to one’s general understanding of financial terminology and financial concepts and principles

Background from the Home – The household has a strong impact on an individual’s perception on spending and saving

Inhibitors to Success – These are physical or mental obstacles to the progress of the individual. They can either be real barriers such as inexperience, lack of skill or physical disability. Or they can be imagined, such as fear.

Habitual Financial Behavior – Involves the normal daily financial activities that an individual engages in.

1.2 Measuring Financial Health Failure to Plan

Overspending

Credit Purchases

Delayed Retirement Saving

Emotional Spending

Inadequate Research

Exposure to Catastrophic risk

Over-emphasis on money

Financial health in short is the relationship between an individual’s revenues and expenditures. The higher the ratio of revenues to expenses the more sound the financial health will be. There are several conditions that negatively impact financial health.

1.3 Financial Net Worth

Financial Net Worth is defined as an individual’s total financial assets less the individual’s total financial liabilities. It is the most important measure of financial health and indicates the capacity to accomplish major financial goals.

Total Financial Assets – Total Financial Liabilities = Financial Net Worth

Financial Assets – Real money or any investment which can be converted to cash in the near future. Example: the money in a bank account, stocks, bonds, mutual funds, retirement accounts, businesses owned and real estate. Excluded are personal residence and owned consumer items (car. furniture, clothing, etc.)

Financial Liabilities – Include all loans and debts outstanding. Examples include student loans or credit card debt.

Calculating Your Financial Assets

FINANCIAL ASSETS

Account Value

Bank Account Checking RM 5,000

Bank Account Savings RM 16,000

Invested Stock RM 20,00

Invested Mutual Fund RM 4,000

Retirement Account RM 12,000

Real Estate RM 80,000

Total Financial Assets RM 137,000

Calculating Your Financial Liabilities

FINANCIAL LIABILITIES

Account Value

Home Mortgage RM 75,000

Student Loans RM 25,000

Credit Card debt RM 7,000

Personal Loans RM 13,000

Auto loan balance RM 5,000

Total Financial Liabilities

RM 125,000

Calculating Your Financial Net Worth

FINANCIAL Net Worth

Account Value

Financial Assets RM 137,000

Financial Liabilities RM 125,000

Total Financial Net Worth

RM 12,000

1.4 Income and Expenses

Another important measure of an individual’s financial health is a statement of net income.

Total income – Includes all of the cash inflows that an individual receives from the various sources of income (Salary, dividends, rental income, gifts, etc.)

Total Expenses – Includes all of the cash outflows that an individual spends to cover expenditures (Rent, utilities, phone, insurance, etc.)

Calculating Your Total Income

Sources of Income

Value

Salary RM 8,000

Dividends RM 1,000

Gifts RM 500

Bonus RM 2,000

Total Income RM 11,500

Calculating Your Total Expenses

Expenses

Value

Rent RM 1,200

Gas RM 600

Electricity RM 120

Water RM 80

Savings RM 100

Tuition RM 3,200

Health Insurance RM 150

Total Expenses RM 5,450

Calculating Your Net Income

Net Income

Value

Total Income RM 11,500

Total Expenses RM 5,450

Net Income RM 6,050

1.5 Credit Report and Score

A credit report is a documented record of an individual’s credit activity. It contains the following information:

Personal Identifying Information: Name, Address, IC, etc.

Record of Credit Accounts: Account balances, payment history and date of opening account

Bankruptcy filings: Any recent bankruptcy filings recorded

Inquiries: Lists of agencies or organizations that have requested your credit report

1.5 Credit Score and Reports

A credit score is a three-digit score that is derived from an individual’s credit report. It is a prime predictor, according to lenders, of the likelihood one may default on repaying a loan. FICO, a leading US credit rating agency, uses the range of 300 (low) to 850 (high).

1.5 Good Debt vs. Bad Debt

Halal or Haraam?

• The Islamic legality should be looked into before borrowing

• Interest-based borrowing is NOT allowed according to Islamic principles.

Acquiring debt for short-term consumption

• This involves acquiring significant debt for short-term items, such as consumer products, vehicles and vacations.

• This type of borrowing is not preferable and is detrimental to one’s financial health.

Acquiring debt for long-term investment

• This type of borrowing involves acquiring significant debt for long-term items, such as college education or home purchase.

1.6 Debt OverloadKey Points to take note of well dealing

with debt

Debt Overload Ratio = total debt / annual income (should be ideally 10 – 20% of one’s annual income)

Beware of the lure to easy credit

Beware of the effect that debt can have to those around you

Although, good debt is preferable to bad debt, too much good debt is also not a good thing.