How to evaluate your financial health

Everyone is encouraged these days to take medical check-ups to identify signs of potential trouble ahead. If certain issues are detected earlier, finding the right cure becomes easier and there’s less likelihood of serious complications.

A financial health check-up works the same. It helps one find out if they are on the right financial track and rule out any gaps that need to be filled. Knowing where one stands financially makes it a lot easier to come up with the right plan for achieving goals in life, and to avoid any serious hiccups along the way.

People in the UAE have a reputation for having better quality of life, generous tax-free income and extravagant lifestyle. However, the reality for many is markedly different, as they struggle with debt and don’t have any protection and savings to safeguard against emergencies and secure a good retirement.

“This is where the financial health check comes in and is of vital and underestimated importance. It allows you to assess exactly what position you are in financial at this time, decide where you want to be in the future and take action which will lead you towards your goal,” explains David Maclaren, a senior financial planner at Acuma Independent Financial Advice.

“In the UAE, it is widely assumed that we are all enjoying the expatriate lifestyle to its fullest, living in wonderful accommodation, driving the best cars, brunching ever Friday and participating in all of our favourite pursuits to our hearts content. For some, this is their reality, but the painful truth is that for most, it is simply not,” says Maclaren.

“Many are in debt, do not have appropriate insurance in place should something go wrong, are saving next to nothing and have no idea if they will ever have enough money squirreled away to be financially secure in retirement or to attend to their children’s further education costs,” he adds.

Basic financial screening involves a review of key areas such as debt management, income protection and building wealth.

One of the first few things to watch out for are red flags that tell a person is heading for financial trouble. Critical signs include excessive borrowing, unnecessary credit card spending and inability to keep up with debt payments.

“You might find that you are in deeper debt than you thought. Do you have loans you struggle to pay? Are your credit cards maxed out, with you making the minimum payments? Are you late paying financial responsibilities? These are among the many signs that you are in financial trouble,” says Maclaren.

“When you are in debt, it is often difficult to think clearly and some decisions you make can simply make things worse. The ‘out of sight, out of mind’ mentality is one that many practice when dealing with debt. It is a coping strategy which might work in the short term but the more you ignore financial trouble, the more it accumulates.”

For Ashok Sardana, managing director at Continental Group, spending more than you earn is the biggest red flag.

“We have to understand that the money we spend using a credit card is not our money. It is money that is borrowed and is available to us at a very high cost if you do not pay back the balance in full. Credit cards are very dangerous in the hands of an undisciplined individual. It is very easy to fall into a debt trap that can destroy your financial wellbeing if you are not careful,” he adds.

Another area that most consumers ignore is planning for insurance. Having an insurance gives people peace of mind that should anything bad happen, they and their family will be looked after.

Ideally, you should have insurances that meet your medical needs, replace your income if you are unable to work and provide sufficient financial protection to your family in case you become critically ill.

“If you have no insurance, your family depends on you to get some. If you have no income protection insurance, be aware that almost everyone will face a period of time when they are medically unfit to work. If you have no life insurance, it may be impossible in future years to buy it because good health is a prerequisite,” Steve Gregory, managing partner at Holborn Assets, explains.

Sardana says insurance is the first base of financial planning and serves as a financial safety net. “Life insurance provides financial protection to the family in the event of death of an earning member. Critical illness insurance is a living benefit that provides a lump sum in the event of diagnosis or a covered critical illness. Medical insurance pays towards expenses incurred for treatment of a range of illnesses,” he says.

“For many of us, it is not a question of if but when we would require medical treatment given the high probability of illness occurring. I don’t want to be paying for my treatment out of my retirement savings or the money I have put aside for my children’s education. If you don’t have adequate insurance, you leave your finances, and as a result the future of yourself and your family, vulnerable to unforeseen expenditure,” he adds.

Contrary to what most people think, Maclaren says insurances are “not nearly as expensive”. Investing less than Dh100 a month, for example, can lead to a half a million dirham payout in the event of a policyholder’s death.

“A healthy 30-year-old non-smoker can take out a 10-year life insurance plan which will pay out Dh500,000 in the event of death for as little as Dh65 per month, the price of a drink in many establishments,” notes Maclaren.

Everyone has their own dreams and has to stop working at some point in their life. In order to meet your goals or satisfy your short-term needs and ensure a comfortable retirement, consider if you have emergency savings and how you can make your money grow.

You don’t have money in the bank that can support you for three or four months without regular income? You could be in serious trouble if you suddenly lose your job. Do you have enough money to pay for your child’s education? Have you saved enough to buy your dream car or home? What about your retirement?

Take a moment to reflect on these aspects so that you will be able to come up with appropriate course of actions to remedy your situation, if necessary.