Understanding Your Financial Position

Understanding your financial position is crucial for managing your money effectively and making informed decisions about your finances.

When you have a clear understanding of your finances, you are better equipped to prepare for your future, make the most of the present, and avoid any mishaps that could work against you. Your financial position is a crucial part of understanding where you are going financially and if your plans need to be altered.


What is the Definition of a Financial Position?

A financial position looks at the elements involved in your financial health. These include your assets, liabilities, and any obligations you may have. You can use this information to gauge the well-being of your finances, as it can show you where you are financially as well as where you are heading. This information allows you the chance to improve your future financial condition based on the insights you have. This applies to individuals as well as companies, as an accurate understanding of financials is necessary to ensure the health of both.


Four Keys to Identifying Your Financial Position

These are vital pieces of information that will help clarify your position.

  • Liabilities – These are debts you need to pay within a year, or you may face financial consequences like excessive interest charges after a specific amount of time.
  • Assets – Your assets can be transformed quickly into cash if necessary. These include savings, investments, and cash on hand.
  • Cash Flow – The amount of money going in and out of your accounts. A positive cash flow is ideal as it means you bring in more money than you spend. A negative cash flow is the opposite; you spend more than you make.
  • Debt – Much like liabilities, your debt is money you must repay.


Analysing Expenses

Knowing where your money goes and why is vital if you want to discover and improve your financial position. You will be able to see trends and identify financial risks, which can help you pivot in more profitable directions if necessary. Using software to analyse your expenses is usually a quick and helpful way to get the information you need.

You may find analysing expenses is simpler if you:

  • Make a habit of looking over your financial statements each month. This is an easy way to see what is coming in and going out.
  • Categorise your expenses. This does not need to be a fine division of categories. Use simple options such as dining, automotive, gifts, and so on to make spending patterns more apparent.
  • Use your expenses to build a budget that works for you.
  • Contact a financial expert to keep track of your finances.


What is a Financial Position Statement?

Also called a balance sheet, your financial position statement is a document that shows financial competence at a point in time by using a rundown of your financial position. You can use this document to determine your net worth.

Financial circumstances can change over time, so it's essential to regularly review and update your financial position.


What is Considered a Healthy Financial Position?

A healthy financial position is about more than your credit score. It also involves gauging numerous factors. Your financial position considers resilience, the ability to plan and manage investing, spending, saving, and borrowing. These factors are seen in these four indicators of a healthy financial position.

  1. You Have a Positive Cash Flow – This simply means you earn more than you spend, can cover your bills, and put money into savings.
  2. Your Debt-to-Income Ratio is Low – Ideally, you will have less debt than you have compared to your income. This position is one that some people dream about having. You are not drowning in debt, and you can comfortably make repayments on any loans you have.
  3. You Have an Emergency Fund – When unexpected setbacks happen, an emergency fund will keep you afloat financially without piling up debt to cover your costs. The suggested amount of an emergency fund is enough to cover expenses for three to six months. Having this cushion will help you sleep well.
  4. You Have Savings and Investments – A healthy financial position means you are not living paycheck to paycheck. You have money set aside and working for your future. Whether you are thinking about an exciting relocation, your child’s education, or a comfortable retirement, you are making the right moves to ensure you have control of your future.


How Can I Improve My Financial Position?

By using the information regarding your financial position, you can identify weaker areas that need work, such as paying off credit card debt or participating in regular savings. The following six tips can show you the best strategies for improving your financial position.

  1. Carefully Track Your Spending

    It makes sense that you cannot adjust your finances if you do not know where your money goes monthly. So, take a month or six weeks and spend as you usually would. You do not want to trim your spending during this period drastically. Doing so would create inaccuracies when you are trying to see a pattern in your spending. After tracking your spending, take a long look at the places you can trim without sacrificing the overall quality of your life.

    Perhaps you indulge yourself with restaurant lunches five days a week. You could try limiting your dining out to one day a week and bring food for lunch the rest of the week. Consider the average cost of lunch is between AUD 20-40 and you can see the savings will add up quickly.

  2. Create a Budget That Works for You

    After tracking your spending, there is a tendency for you to choose to cut back on everything unessential for daily life. Unfortunately, adopting a Spartan lifestyle only works for Spartans. It is vital to your success in making a budget that you trim expenses without being so extreme you cannot stay with it. Remember, you can adjust your budget over time. So, you may get to a point where you prefer the coffee you make at home to the coffee shop variety and cut the expensive brew out completely.

  3. Reduce Your Debt

    You can successfully trim away your debt by opting to pay off your highest-interest debts while making minimum payments on other debts. Once a high-interest debt is paid off, move on to the next highest until all debts are paid.  

    Consider a Side-Hustle

  4. Working side hustles are not limited to younger workers who are still looking for their passion in life. There is good money to be made if you find the best option for you. Think about your skills, experience, and what you enjoy, as side hustles come in all shapes and sizes. Once you have started making money, you would be wise to pay off debt and save as much as you can for your future.

  5. Create an Emergency Fund

    Having a fund that can cover your expenses for three to six months can save you stress and help keep you from acquiring debt. When creating your emergency fund, remember you want to limit your access to it so you will be less likely to use it for impulse purchases. Also, make adding money to your fund a priority and, if possible, arrange regular automatic payments to your fund.  

  6. Make Wise Investments

    Once you have your finances in a good place, you can put more effort into building wealth. Many people feel that means investing. The key is to make wise and well-thought-out investments and not put your money into ventures that your neighbour’s uncle says are sure things.

If you find the process overwhelming or need assistance, consider working with a financial advisor who can provide personalized guidance based on your individual circumstances.

If you want to try investing but know little about the market, consider working with a financial professional like the Grace Life and Wealth team. Your investments will benefit from industry experts with years of experience.

Whether considering your financial position as an individual or a business entity, it is vital to remember that what you do not know can hurt you. Working with professionals who understand the wealth-building process is the best way to ensure that your financial position is healthy and your wealth is growing. To learn more about how our financial experts can help you understand and improve your financial position, contact Grace Life and Wealth. Our team has assisted hundreds of clients in attaining and maintaining a healthy financial position, and we can help you, too.


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