Sunday, 13 April 2014

Are you Financially Sexy?

I came across this post which spoke about being "Financially Sexy" and immediately liked it. Thought I'd share the gist with you guys, while adding my opinions to it.

It's not that someone who earns a lot or has a lot of luxuries at his disposal is financially sexy, as the myth is, because we all know the numerous rich people who have applied for bankruptcy, or gambled away their riches. So what is financial sexiness and how do you achieve it? Well, there are certain criteria that you have to meet in order to become financially sexy.

  • High Credit Score
It is vital that you have a very high credit score, preferably more than 85% of the maximum score. If the score is calculated up to a scale of 1000, your score should be above 850. With a high score, not only is it easier to get a loan, but you get them at lower interest rates too.
I haven't run my score yet, gotta put it on the agenda and get it done as well.
  • Savings >= 15% of  Gross Income
This is a critical measure that very few people realise. The general tendency is to consume during the month and the leftovers are the savings. I prefer to set aside 15% of the income at the start of the month and the remaining can be made available for consumption. If there are leftover funds at the end of the month, they can be added to the savings as well. This is especially essential since the American consumerism has spread all over the world and credit cards have became a necessity for some, rather than a convenience. The next measure highlights this as well.
I generally save about 15% of my income every month, unless some unexpected large expenses come by. But I'd like to save some more, and increase my investment pool now.
  • Credit card utilization at 35%
People tend to utilize the entire credit limit that is available to them, which is a risky proposition and would be avoided by a financially sexy person. One should try to utilize not more than 50% of the credit card limit, and a financially sexy person would limit this to 35%. This not only reduces the risk on the credit, but also boosts the credit score.
Fortunately, I don't have a credit card. But I don't see myself exceeding the 35% threshold even if I do get one in the future.
  • Healthy Emergency Fund
I strongly suggest that one should have at least 3 months of living expenses worth of liquid funds stashed aside for emergencies. I am aiming at 6 months of living expenses to cover me, because you never know how the tables might turn on your fortune. The simplest example that comes to mind is the recession of 2008.
I did have a good fund until a few months back which unfortunately got used up to meet some investment needs. That was wrong on my part and I am already working on getting that fixed. I have about a month's worth of savings in emergency funds, which I'll increase to six months at the earliest and hold it there.
  • Debt to income of 35% or less
This ratio represents the amount of debt you owe to the amount of income you earn on a monthly basis. The 35% figure is sufficient to give you some flexibility with your future choices, should you opt for anything different. But a lower ratio would certainly be preferable. The lower ratio also provides the added benefit of obtaining additional loans with comparable ease.
I do have a pretty high debt, about 50% of my income, in the form of home loans. Over a year or two, hopefully, I will be able to bring it down to 35%.
  • Portfolio with appropriate risk-reward relationship
This is a pretty debatable topic because it depends on individual financial conditions. What I am trying to put across here is that you should not only be comfortable with your portfolio allocation, but should also be right about it. For example, a person aged 60 should not have a greater chunk of his portfolio in high risk investments - on account of his retirement, he should preferably have a steady source of income from pension accounts, or rental incomes or any other source of steady income that is not susceptible to drastic losses unexpectedly. More on portfolio allocation in a future post.

So, what do you think? Are you financially sexy or will you have to make some changes to fix up your financial situation? Do you think there are any additional criteria that should be considered here?