The word Financial Reboot may sound strange. It may conjure up different images for different people. Some of them could be:

• Selling all your investment holdings
• Selling stuff that you do not need
• Closing accounts and credit cards
• Paying off loans
• and many more

All of the above are quite drastic steps and should not be done without a plan or a need.

What then is Financial Reboot? Doesn’t Reboot mean you have to go to zero?

Financial Reboot is a softer term and activity that does not mean anything disruptive. Making disruptive changes to your finances without a plan can be counter productive.

For most of us who have been working and earning, saving, spending and investing for more than one decade, our financial lives are usually very scattered.

Multiple bank accounts, retirement accounts, credit cards, unrelated investments, insurance policies that we were sold, pending bills and losing money on choices that we would not make today (timeshare for example).

Financial Reboot does not try to untangle all of these at one go. Rather there are 4 steps in which we do a Financial Reboot in my coaching service.

• List down the financial parameters in an easy and consolidated format
• Run some checks on these, looking for safety nets.
• Get to know or identify the goals in the financial picture
• A comprehensive S.W.O.T analysis and action, if required.

Financial Parameters at a glance

I have worked with several clients and have seen the following simple parameters capture a wide range of financial situations.

• Monthly Net Income – after taxes and deductions
• Monthly Avg Expense – except rent/mortgage and debt payments
• Monthly Debt Payments – except rent/mortgage but include car, credit card payments
• Monthly Housing Payment – mortgage or rent along with monthly property taxes and insurance

Above 4 numbers give a rough idea of the monthly cash flow.

The following 4 are snapshots of the financial picture at any time.

• Total Savings
• Total Investments
• Total Debt Balance
• Total Mortgage Balance

Note that the low level details (how much you spend on coffee every month) are not important at this stage. This keeps the data gathering easy and intuitive for the client.

Run some checks on these, looking for safety nets

What can we do with the 8 numbers? A lot, actually.

From the 4 monthly numbers, we can deduce a few interesting things.

• Is the person living below means or paycheck to paycheck?
• How much can be saved per month?
• How much of the income is going towards debt servicing?
• What is the total working capital (TWC) that is needed for a month?
• How much of the income is spent on housing?

From the 4 snapshot numbers, we can deduce the present picture.

• How much of the savings can cover the TWC, if the person loses income?
• What is the Net Worth and is it positive or negative?
• How many months of debt obligations are covered by the assets?
• How much of the assets are funded by debt?

Get to know or identify the goals in the financial picture

The above analysis of the financial parameters will show some aspects that will need improvement.

For example, the debt to income ratio may be higher than usual or comfortable.

In that case, the debt payments need to be reduced. This can in turn, mean paying off debts from the savings, or consolidating the debt into lower interest rate instruments.

Also if the savings are planned to be used to pay off the debt, we have to see if we are not compromising on the emergency fund requirements.

As we work through these, some of the present day goals become apparent.

A comprehensive S.W.O.T analysis and action, if required

The last part of the Financial Reboot is to do what is called a S.W.O.T analysis.

• Strengths like having good savings and debt coverage ratio
• Weaknesses like excessive debt, high housing cost
• Opportunities like deploying extra cash, having monthly savings
• Threats like income loss, economic factors, spending out of control

Conclusion

The Financial Reboot is a system of looking at one’s finances from a simplistic yet comprehensive way.

The beauty of this method is the simplicity of inputs, less time to analyze and clearly focusing on the right goals.

If you would like to do a Financial Reboot of your own finances, reach out to info@startyourfinancesright.com.