9 ultimate checklist to know if your financial life is on track or not?

POSTED BY manish ON September 21, 2015 COMMENTS (81)

Let’s quickly see today what I call as a good checklist to find out if your financial life is on track? Are you doing well? When can you say that your financial life is an ideal financial life?

What are those parameters? 

  • Is high income good?
  • Is having low expenses great?
  • Is having 50 lacs in saving’s great?

A lot of investors do not even know if they are doing good, bad or just average.

checklist of good financial life

I know its very subjective to say if someone is doing well or not and no one other than you should make the final judgement, but still lets look at some high level points which will should be present in a good financial life. Atleast you can get a sense of how you are doing on few parameters.

Lets see how many of these are true for you.

1. You have positive surplus each month

The first indicator I think is very simple and very important – “Are you left with a positive surplus by the end of the month or not?”. Its as simple as that. Unless you are left with some surplus (income – expenses), it makes no sense just to brag about your salary itself. What will matter is if you are having a good positive surplus each month or not.

And I am talking about a decent surplus, like 20-30% at least. So if you are earning Rs 80,000 a month, but you are left with just 2-3k by the end of the month, please don’t say you are left with surplus. It should be at least 15-20k, because this is what will help you in building your wealth. If can surely say that you earn a lot and spend like a king and enjoy life like anything. Well thats great and its surely a great thing. But not having a surplus is surely a big negative point.

Did you pass this check or not?

2. Your networth is going up on yearly basis

Is your networth increasing on yearly basis? Are you getting wealthier in totality over years or not?

  • Are you wealthier compared to 5 yrs back?
  • Are you wealthier compared to 3 yrs back?
  • Are you wealthier compared to 1 yr back?

I am not saying that be highly rigid about 1 yr. It’s totally fine if your graph is a bit down for few months or last 1 yr, but as a general rule, it should be moving up over the years (especially if you are young and moving towards your retirement)

If the answer is YES, then fine – you are doing great, else there is something you need to fix. Your networth would keep going up and up in two cases. First is when your investments are doing well and the interests and returns you earn on it add up, this happens mostly in later part of your life, when money already have reached to a level and now the compounding helps it growth further without your suppose.

The other case is when you keep investing out of your surplus each month and its very important in initial years of your life, because only when your net worth reaches a respectable level, you will be able to feel the power of compounding and its effect on your net worth ?

Did you pass this check ?

3. You are not heavily dependent on loans to pay your bills?

If I take away your credit cards with the condition that it will be returned to you only after 3 montsh, will you panic?

I am sure many investors will panic and start wondering how they will manage now. Note that said “heavily dependent” and not “heavily using”. Personally I use credit card a lot and frequently, but you can take away my credit card and never return to me and I will not even care for a minute (after I block it).

However, some people are so dependent on credit card, like its oxygen for them. Apart from credit card, a lot of people get into this cycle of

  • Need money for some purpose
  • Take personal loan
  • Keep paying the EMI to clear off the loan
  • Need money for some purpose
  • REPEAT !

This is a very unhealthy sign in your financial life and you should just not be doing this because its messing up your credit report and it will cause you insane amount of trouble getting future loans

Did you pass this check?

4. Are you protected by external risks which will destroy your wealth

In technical language, I mean to ask if you have taken life insurance, health insurance, added life insurance if you have home loan or not.

Imagine, that you are saving money for your downpayment of your dream house, but you dont have a health insurance (here is a checklist on how to buy health insurance) and suddenly some accident occures which required hospitalization, what is going to happen?

All your down payment money which you accumulated will just disappear and you will be back to square one, wondering how will you achieve your house goal now?

If you didn’t take sufficient life insurance and you have a home loan EMI, and you are gone!, then your family will either have to pay the money from somewhere or vacate the house.

As per a rough calculation, if a male aged 30-35 yrs earning 10 lacs a year, wants to take sufficient life and health insurance, he can get a 1 crore worth of term plan and a 5 lac health insurance for around Rs 20,000 a year easily. Thats just 2% of his yearly salary. I think you should do the math, and judge if its worth covering these risks or not. By the way taking your life and health insurance is a one time task. We suggest you head over to Coverfox and leave your details there if you are interested in purchasing health insurance.

Do you pass this check or not?

5. You will be able to handle sudden surprise expenses without external help

Do you have enough resources to handle surprise expenses or any unplanned expenses? Imagine following scenario’s

  • Your father needs 75,000 by tomorrow
  • You spouse needs Rs 1 lac which will come back after a 1 month.

Are you in a situation to arrange this money instantly (atleast 2 months of salary) or not?

By instantly, I don’t mean that it should be lying in your saving bank account, but can you atleast arrange for this amount yourself without any external support or not is the main question.

Many people I know will have NO as the answer, because they either have locked the money in financial products because of tax saving or they just don’t have it. So this point actually tests how you have managed liquidity in your financial life.

Are you able to pass this check or not?

6. You are investing a minimum of 10% of your income consistently

This is related to the first point. But still lets give a better framework to it. Are you investing atleast 10% of your income consistently or not? Ideally it should be maximum you can afford to invest, but lets give a number which looks possible for everyone.

So if you earn Rs 50,000 per month, you should atleast be saving Rs 5,000 a month, that too consistenly.

Please dont say you started a recurring deposit of Rs 5,000 few months back, BUT later stopped it because your kids school fees had to be arranged. That does not qualify!

I think any investor has to first get learn and experience what it feels to regularly invest and next comes the conversation of mutual funds, generating high returns and all that.

Thats why, I think once you start your career, you should atleast open a recurring deposit and let it run for a year. First see how the wealth accumulation looks like, and how does it feel your wealth growing.

This will give a good base to start your wealth creation journey.

Anyways, Did you pass this check or not ?

7. You are not over-leveraged beyond the danger levels

What percentage of your income goes into paying EMI’s?

The higher it is, higher is the leverage. And beyond a level, its highly dangerous. Imagine a family whose total income is Rs 1 lac a month, but they are paying an EMI of Rs 72,000 and managing everything else in the rest amount.

Imagine what all can go wrong with this situation?

A lot of people commit themselves to too much debt which looks managable in that moment, but in long term they are a big pain.

Double Income, No kids families with too much debt

The best example I can give are double income couples, who take the loan considering that both husband and wife will keep earning and the incomes will keep rising.

However few years down the line, if wife stops working due to the new born kid (most of the cases), it becomes very tough for them to manage the EMI, and other expenses.

What is the problem here?

They planned for the “best case” and not the “worst care”. So when you plan your loans, the future looks rosy, everything looks perfect – but life is not like that. You have to consider all angles possible and in advance think about all things which can happen in general and then position yourself towards it.

As a thumb rule (which obviously does not make sense in every situation) is that one should not be paying more than 40% of their income in EMI. Keep a lot of breathing space in between. This is not applicable to you, if you are highly adventurous.

Did you pass this check or not?

8. You are earning real return in positive number

Are you earning positive real return on your investments? Which means that your post tax returns are beating inflation.

It makes no sense to earn 8% in a fixed deposit, out of which 30% will be deducted as tax (if you are in 30% tax bracket), and left with 5.5-6% return at the end of the day, whereas prices of all things are going up by 9% inflation.

So when you tell yourself –  “I have invested in FD”, in reality you have only earned a positive absolute return, but a negative real return.

Its exactly like, you can buy apples for Rs 150/KG near your home, but you went to that favorite shop 5 km away here you get it cheaper at Rs 135, only to realise later, that you spend Rs 40 in petrol.

So as a good practice, keep limited amount in saving bank, fixed deposits (especially if you are in higher tax bracket) and more and more in asset classes which will give you higher return (with high volatility, not risk) like Equity mutual funds, stocks or real estate.

Did you pass this check or not?

9. You are on a high level clear what you want from your financial life

This is one parameter which I like and its not related to numbers.

So here is my question to you – “Do you have clarity on where you are headed in your financial life?”

You have been working from last many years, and you are saving money properly and everything is in place, but what is your game? Where are you headed towards?

Let me explain you with an example

When I called one of our clients from Bangalore, just few days back – he told me he is headed towards creating his ONE crore networth in next 4-5 yrs and he is already 40% done.

I loved this, because what he has done for himself is that he is kept all the clutter out and he is highly focused on what is wants out of his money. He knows his game !

  • So are you headed towards becoming “Debt free” and working towards it?
  • Are you headed towards buying a house in next 5 yr?
  • Are you headed towards building a regular income of Rs 40,000 per month in next few years?
  • Are you headed towards spending 50% of your income each month and enjoy your life to fullest without worrying for future?
  • Are you headed towards setting up a business along with your job?

So whatever it is, it has to be very clear. Dont go in silence when I ask you where are you headed? A lot of investors face this problem of not knowing what are they doing, why are they doing it, what they want to achieve ultimately, everything is vague and very unclear. Dont be like that.

Are you able to pass this check?

How much did you score?

Out of these 9 points, I would like to know how much did you score and if you are happy with it? Where can you improve and whats your plan towards it? Do you think this is a good checklist which you should look each year once and ask yourself about it.

Please share your views about this article in comments section.

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81 replies on this article “9 ultimate checklist to know if your financial life is on track or not?”

  1. akhileshchauhan says:

    Hi Manish,

    No words of thanks will suffice the financial enlightenment you are providing with your articles for our age.
    I give 48% as EMI, 4% for NPS, 12% in SIP, 25% for house hold, remaining 11% as surplus to be utilized for premiums annualy,
    Am I on right rack, I have bought as LIC endowment with very high premium, 5% of my annual net income goes as premium for that policy. shall i surrender that policy.

    1. Firstly you need to know that if you surrender your policy which is not 3 yrs old, then you will loose everything. Hence take that into consideration.

      Having said that we think that if you are facing financial crunch each month, then it will make sense to get rid of this policy so that you have this 5% available with you.

      Also we think that your EMI is on higher side. as a general rule, we suggest one to not have more than 35% or max 40% of their income as EMI. So see if you can reduce that.

      Manish

  2. ParimalaMahesh says:

    Wonderful Article!!…Read such an article after long time. Scored 8/9….I need to know more about equity and mutual funds to minimize my investment into Fixed deposits(though started investing in real estate)…I have very minimal knowledge on both. If you show me some article on those for a beginner like me will be much useful.

    How many articles you will write for us, don’t find time to read all those babies. Jago is becoming an Ocean…Keep up the good work!!!….Thanks for the good post.

    1. Hi ParimalaMahesh

      I can see that you are interested in investing in mutual funds. I want to share that now you can invest in mutual funds with Jagoinvestor as your advisor

      We create a FREE online account for you, from where you can invest and redeem online.

      Our team will be happy to explain you more on this.

      Find more at https://www.jagoinvestor.com/start-sip

      Manish

  3. Chakradar says:

    Great arcticle!!!Loved reading it. Scored 8 / 9.

    1. Glad to know that!

  4. devgolchha says:

    Manish, These are really some fundamentals questions which should be answered by every earning citizen every year . I have some additions to make. 1) Your plan and goals will modify with change in circumastances(increase in income, increase in expneses, sudden expense, some abnormalities happenening). So keep your rules intact but strategy flexible; b) Do not feel low even if you strat SLOW and savings look TINY against your goals. Its always better to acheive partly then to have not started at all. & who knows that the slow start may at some point gain pace(I started my savings in 2005 with my first job. Being unaware of some basic financial rules, I was ZERO in 2010. I restarted in 2011 and today (jan,2016) I am betteroff than 80% of my colleagues and a passionate saver. I plan to get financially free by 2020.

  5. Abhi says:

    Pretty clear points . I am stuck for point 9 , I have started building corpus but not yet finalized any figure . Infact looking to have lumpsum amount over a period of 7-8 years,.

  6. Neha says:

    Manish,

    That’s very nice article and wonderful. all points are very good but i stuck at one point where you mention that you need to earn more than fixed deposits. Can you please list out where should we invest to earn more than 8-9%?

    Thanks in advance 🙂

    1. Equities and mutual funds.

      1. Nikhil says:

        HI Manish,

        If my FD returns are free from tax for NRE account,can you suggest what percentage of liquid assets should I have in FDs?

        Thanks
        Nikhil

        1. FD is anyways liquid ?

  7. Ajish says:

    I scored 5. Guess I need little more attention in planning my finances.

    1. Yes, 5/9 is not a wonderful thing .. You will have a lot of things to work on

  8. Anand says:

    Hi Manish,

    Thanks so much for this great article. All the points put together very well. I am a big fan of you.

  9. Shubhojyoti says:

    Great article. 8/9 here. Due to the EMI part which is 50% outgo every month. Quick question, when you ask about the surplus every month, SIPs should not be considered an expense right? Me and my wife both have a fixed amount (around 35-40% of our salaries combined) which we put on SIPs on 7th of every month so we never consider that part as being with us for expenditure.

    1. Yes, SIP is not expenses !

  10. Jay says:

    Brilliant post as usual!! …. Big fan of yours. Kudos for the awarenes you are spreading. This is really the best yardstick about one’s financial standing.

    1. Thanks for your comment Jay

  11. Chakravarthi says:

    Excellent article.

    1. Glad to know that Chakravarthi ..

  12. Pramod says:

    I don’t pass 5,8 and partially 9.
    w.r.t 8 I fall in 30% bracket but I have not invested any where apart from Term deposits and PPF. I am still looking for investment options which can give me guranteed returns of 12-15%. Any suggestions will be welcomed.
    With respect to 9 I want to buy a house within next 2-3 years but not very much clear how.

    Manish,
    Do you provide financial planning consultation ?
    How can we connect and discuss the same ?

    1. Hi Pramod

      Looking at your query, I think your case is complicated and you should discuss and consult a financial planner, because just a random answer will not help you at all.

      If you are interested, I suggest you look at our financial planning service also and fill up the form there to have initial discussions

      http://www.jagoinvestor.com/services/financial-planning#fill-form

      Manish

  13. Neetu says:

    9 on 9, Manish! Great article. Investing has become a passion and it feels good when we are on the right path. Your articles are greatly appreciated. Hope we can meet some day, have tried couple of times though 🙂

    1. Thanks for sharing that.

      WHy dont you come to our workshops sometime . It would be a great day spent ! . Which city are you from ?

  14. Jitendra says:

    Hi Manish,
    Nice article as always !
    Out of these 9 checks, I do not pass only one i.e. no. 7 – EMI thing. I pay about 50% of my Income as EMI. And that is due to Real estate investment.

    Thanks,

    1. DOnt worry .. if you get 7/9 or more , its good 🙂 .. one or two points here and there is fine 🙂

  15. Narsi says:

    What an article..A very Useful information at one place and also tells us where we stand..I really liked it.

    I keep on reading all the articles of Jago and I am a bog fan of this. Thanks for this wonderful and very useful article.

    1. Glad to know that Narsi ..

  16. umesh says:

    goodone

  17. Deepak says:

    nice article. really very useful.

    1. Thanks for your comment Deepak

  18. Kishore says:

    One thing I like most about JagoInvestor is like that it is to make people financially aware. Most of other blogs are to make people equity aware. That makes a big difference. All the articles are written for financially novice/intermediate people, while most of the other blogs are for HNIs.

    1. Glad to know that Kishore ..

  19. Sashi says:

    Hi.. dus us sashi.. working in a nationalised bank frm 3 yrs.. This yr came to 10% tax bracket.. Annual gross 440000/- NPS cutting 37k only..
    Have acount with fundsindia. Aggressive customer.. getting stable slowly.. closed all traditional insurance policies.. Have 25lac term insu.. Til now, tried intraday.. only going for market order.. finally losses.. Sip in equity mutual funds for 7 months.. tht too loss..

    Wana go for elss.. 12500 per month.. then i can save 1.5 lac under 80c. Then can i show my nps 37k under extra 50k deduction under nps?? Or we need to invest 1.5lac plus 50k completely undrr nps to avail tht 50k benefit..

    As i am not new to demat acount, cant i open RGESS to avail 25k savings?

    I stopped going for home loan coz i felt stock markets r beter than real estate?? How to achive it.. plzz.. answer to al my ques..

    1. Yes you can invest 12500 in ELSS and claim the extra 50k in NPS

  20. Nirmal says:

    Hi Manish… Thanks alot for giving me much needed clarity to check wheather I m on right path. I m still 23 bt knowledge by u n jagoinvestor has made me financial more sound and confident. I m gr8 ful to u n team. Thanks alot… Regards

    1. Glad to know that Nirmal ..

  21. Nanda says:

    Very good article Manish.
    On a different note, I read an article on freefincal.com blog about best Indian personal finance blogs. I was disappointed with a negative comment that he has made about you and about this blog there. For me it was surprising as well because I’ve been reading Pattu’s articles and I’ve always liked his humble attitude. But this is the first time there was a flavour of arrogance in his article and in his comments.
    Anyway not wanting to delve much deeper into it, I just wanted to highlight that irrespective of what others say, please continue your good job of educating financial illiterates like me. It’s your lucid language in layman terms that makes people like me understand about personal finance and not some hi fi IIT standards financial statistics and graphs. I want to assure you on behalf of all like me that we are very thankful to jagoinvestor for changing our financial life to what it is today and so will continue to support you.

    1. Thanks Nanda

      It was nice to read your comment and how Jagoinvestor has created a good impact on your financial life. Lets not get too deeper into Pattu’s article and what he has shared from his side. I think he is doing his bit for educating indian investors and he is contributing in his own style. His dedication and focus inspires me and teaches me how I can improve myself in whatever I am doing.

      Lets move forward and focus on how we can add value in others financial life. Thats more important.

      Also, thanks for acknowledging about our contribution and your faith in us. It means a lot to us 🙂 . Keep reading and helping few more investors from your side.

      Manish

  22. Anurag Satija says:

    Which all mutual funds to invest in? And are they safe?quiet confused.

    1. Debt funds are quite safe !

  23. Sambaran says:

    In the list of insurance, are you forgetting home-insurance (not the content insurance but the structure insurance against earthquake/fire etc)? For home owners, I consider this insurance as important as life/medical insurance. The premiums are super cheap too.

    1. Hi Sambaran

      Yes, its important – but I have taken a more high level points .. We can keep adding these points , but then it will never end 🙂

  24. Krish says:

    Manish. Excited to see this checklist. I often use many checklists at work and this checklist for financial life is great way one can quickly assess one’s status. Just curious to know what is the threshold on higher side and lower side applicability of the checklist. I mean to say whether this checklist holds good even one has 10 crores and above or to someone like youngsters who is yet to earn.

    I assessed mine and my score is 8/9. I am not happy with my investment returns.

    1. Hi Krish

      Someone who has 10 crores, I think this one fact itself overpower everything 🙂 . I made the checklist keeping a common salaried/business person who earns anywhere from 10k a month to few lacs a month.

      You are not happy with your investment returns is a totally different thing. How are you doing overall in your life is what this checklist will tell you from a birds view point of view !

      Manish

  25. Renjith says:

    When you say surplus, is that after investment/savings or before that. Because most of the months, after investments my surplus is negligible. I am worried on that. Not sure whether its a reason to worry.

  26. G S Sastry says:

    H Manish,

    Nice Article. When will you conduct a work shop in Hyderabad?

    Regards
    Shastry

    1. We are doing it on 1st Nov 🙂 . Next article will have registration link

  27. Karthik says:

    Hi Manish,

    As usual a good article. I have not yet evaluated myself. Because I have basic doubt in point 1. Is it just expenses i need to consider or exp + investment ?

    karthik

    1. Its mainly expenses ! .. not investment, because only out of your surplus you make the investments

  28. Vipul says:

    Scored 6/9. Need to work a lot on other aspects.

    I need clarification on point 1, “positive surplus at the end of month”. Is this surplus after deducting all expenses and investments?

    1. Its not after deducting expenses, not investments

  29. Santanu says:

    That’s a very useful article Manish. I think this will help people to judge their financial planning status as well as help them to manage money by their own.

    1. Thanks for your comment Santanu

    2. Thanks for your comment SantanuThanks for your comment Santanu

  30. Himanshu Choudhary says:

    I adored the checklist, as going through it certainly enhanced my confidence regarding my financial life.
    I could clear 8 out of 9. However check point 4 I could not.
    In 2013 after reading How to be your own Financial Planner I did looked after Term Insurance plans, I even short listed TATA AIA Iraksha Supreme & processed for 1C Term Insurance, but after lot of follow-up, document submission, medical (nothing abnormal was found) TATA AIA revised the premium aprox 1.6 times (saying due to nature of work – I am working at LNG plant). I was so very frustrated that for taking the Insurance I had done aprox 100 email correspondences with TATA AIA what would happen in case I am not there. How could my family manage? There after I gave up on this aspect, I might be wrong but it was really bed experience for me.
    Going through checklist is extremely worth. Thanks Manish.

    1. Deepesh says:

      Himanshu,
      Insurance companies have to weigh their risk to arrive at an appropriate premium. So, if they think your profession puts you at higher risk, they will price the plan accordingly. Can’t really fault them for that. But yes, they should have conveyed this decision much earlier (and not taken so many e-mails to communicate their decision to hike the premium).
      Adequate life cover is a must. Talk to other insurers. They may not hike the premium by so much. However, please disclose this information (about your profession) to every insurance company you talk to. Hiding this information may impact claim especially if the most unfortunate happens while you are on work.

    2. I think you didnt do the rigt thing .

      Underwriting process checks the nature of work and increase the premium depending on that. As you are working LNG plant, and even though you dont agree, you have more risk of life compared to another average person , so your increase in premium was justified.

      I think you should take a term plan ..

      Manish

  31. SUNIL says:

    EXCELLENT CHECKLIST.
    An Eye opener too.

  32. Chidambaram says:

    Excellent list – If everybody follows this list ,they need not worry about the future

    1. Thanks for your comment Chidambaram

  33. Deepesh says:

    Great Manish !!! Agree with most of the points. Point no. 2 about Networth is spot on. Have a minor reservation about point no. 9. Sometimes, it may not be easy for investors to earn positive real return for a few years. Stock markets can be rank under-performers among asset classes for a reasonably long period say, during 2008-2013.
    So, not much they can do. It is also not easy to switch between asset classes for retail investors based on outlook.

    Better option would be to stick to asset allocation and investment discipline rather than trying to earn positive real return. Of course, this is to be done with the hope that positive real returns will happen in due course.

    1. Yes, I didnt mean to say that the graph has to be up each year , but on a higher level it should be increasing .. that was my point .

  34. dinesh majumdar says:

    I got 8/9 score

    1. Glad to know that dinesh majumdar ..

  35. Venky Bahrain says:

    I scored 9/9

    1. Glad to know that Venky Bahrain ..

  36. sree says:

    If a person spends 25% on home loan Emi. Another 10% on investments including insurance and mutual funds and a cash surplus of 5%, then should this be considered a healthy situation. Can this be considered as 40% investments?

    1. I think you should not consider EMI as investment part . Only take 50% of that ..

  37. DrMonika says:

    Planning finances and managing savings is a tough job. Your 9 points very finely focus on the key issues with reasons n solutions.

    1. raj says:

      Yas,agree with you

  38. saurabh says:

    half passed in check 4 as not taken health insurance due to laziness only and reason is that i have the company insurance. For rest of the checks passed with flying colours:):)

    And good part is it gave me a happy feeling..

    Saurabh

    1. Great . I think you should complete the health insurance part asap .

      Do one thing .. Go to https://www.coverfox.com/jagoinvestor/ and leave your details there ..

  39. Shashi says:

    I think an item needs to add “Are you writing down your daily expenses?”. I think this is very critical and actually the beginning of personal financial planning. The elementary health check as it reveals the actual expenses that you incur every month. As Robin Sharma says: Awareness -> Better choices -> Better results.

    1. Thats a good point . Thanks for sharing that !

  40. Anand says:

    Excellent list. Should be mandatory read for everyone!

    1. Thanks for your comment Anand

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