In the midst of the recent anxiety and unpredictability of the global financial markets, many investors have been left wondering if this is still a good time to look for investment opportunities. As with everything in life, there are two sides to the same story. On the one hand, the economic turmoil could be taken as a clear sign to rush out and away from the market. On the other hand, an economic turmoil can be a signal for long-term investors to slowly work their way into the market, following the belief that crises are often opportunities in disguise. What most people forget, however, is to ask whether they are even in a position to invest. The basic questions: “Are you financially ready to invest?”, “How do you determine if you are financially ready to invest?” and “What have you done so far to gauge your financial readiness?” are furthest from their minds.
How To Assess If You Are Financially Ready
Determining your financial readiness is not simply estimating how much you have in your bank account. There are 3 barometers of financial health that you will have to check yourself against: Personal Income and Expenses Statement, Personal Net Worth Statement and Financial Ratios. Only when you systematically review your finances will you be aware of your readiness to invest in the future. Let us go through the 3 barometers so that you will be more aware of what they are and how they can give you an idea of where you are financially.
Establish Your Current Financial Standing
Firstly, you should be able to keep a good track of the money entering and leaving your wallet. You can achieve this through a personal income and expenses statement, a tabulation of your monthly income and expenses. Someone who is financially sound will have greater money inflow than outflow.
The next step in determining your financial readiness is to identify your assets and liabilities and compile them in a Personal Net Worth Statement. This statement shows you whether you are a positive net worth individual with many assets or whether you are a negative net worth individual, one who is hung up with the many liabilities of life.
Finally, to really determine if you are financially ready, you must understand important financial ratios that will assist you in seeing the bigger picture of your financial health. Here are 3 financial ratios you need to be aware of:
1. Basic Liquidity Ratio = Cash or Cash Equivalents (Liquid Assets) / Monthly Expenses
This ratio provides an indication on the number of months a person could continue to meet his/her expenses from existing cash or cash equivalent assets after a total loss of income. We should have liquid assets equal to 3 to 6 months expenses in an emergency fund.
2. Savings Ratio = Savings / Gross Income
This ratio provides an indication of what percentage of gross income an individual is setting aside for future consumption. A ratio of 10% or more is healthy.
3. Investment Assets to Net Worth Ratio = Total Invested Assets / Net Worth
This ratio provides an indication of the value of investment assets as against net worth. This would show how well an individual is advancing towards wealth accumulation goals. A person should have a ratio of at least 50% and it should get higher as retirement approaches.