1.0 Self Assessment and Measuring Financial Health

1. 1.0 Self Assessment and Measuring Financial Health

2. 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 Medium High Personal Finance Literacy 80.95 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

3. 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.

4. 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.

5. 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.

6. Calculating Your Financial Assets

7. Calculating Your Financial Liabilities

8. Calculating Your Financial Net Worth

9. 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.)

10. Calculating Your Total Income

11. Calculating Your Total Expenses

12. Calculating Your Net Income

13. 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

14. 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).

15. 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.

16. 1.6 Debt Overload Key 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.