NOW i KNOW !

Newsletter No. 02-2015

Have you taken the annual medical

checkup recently?
Do you know that just like physical health, ideally we need to
regularly maintain a good health of our financials. Maintaining
a financial health is in many ways similar to maintaining
physical health; that we need to do a regular (financial)
exercise, that we need to dispose bad habits deteriorating our
(financial) health, that we need to conduct a regular (financial)
health check, and that in some cases we need to see a doctor
(expert) to have our (financial) health improved, or cured if
unhealthy.
In this current article, we will go through on how we can do
ourselves a financial diagnosis or a financial health check.
Why financial health check? A financial health check is the
first and important step in determining what to do (or not to
do) with our finances. The financial health check is an
essential preliminary steps in a Financial Planning Process.

Self-Financial Diagnosis
Understand how well my finance is.

There are quite a number of financial health check

measurements that we can use. We will discuss
three financial health check measures, they are:
1. Debt Service Check
2. Bankruptcy Check
3. Saving Performance Check
Before going through the health check activities, we
need to have a same understanding on terminologies to be used within the context of this financial
health check. The terminologies are: income, debt
services, debt, asset and savings.
Income is the money that we receive, whether
regularly or not. It can be in a form of salary, bonus,
allowances, etc. For the purpose of our discussion
in this article, lets say we have a regular income
which comprised of a monthly salary of Rp 20
million and an annual bonus of about Rp 24 million;
and assume no increase on the salary.
Debt Service is the amount of money that we
regularly (usually, monthly) spend to pay-off our
debt. For example, if we have to pay an monthly
installment of Rp 4 million for paying a house loan,
Rp 2 million for paying a car loan, and Rp 2 million
for paying loan on a fancy motor-cycle; than it is
said that we have a total debt service of Rp 8
million per month.

Debt is our total outstanding liabilities or amount of

money that we owe to other parties. For example,
lets say we have regularly paid-off our debts by
monthly installment for several years on the house,
the car and the motorcycle; and right now, our
outstanding or remaining debts are Rp 300 million
for the house, Rp 100 million for the car, and Rp
20 million for the motorcycle. They made up a total
outstanding debt of Rp 420 million.
Asset is the total value of our properties which can
be converted into cash, examples are money,
commercial papers, house, car, land, jewelry, art
piece, etc. Asset can be classified into two: liquid
assets and non-liquid assets. Example of the liquid
assets are cash, savings, deposits; things that you
can convert to cash in an immediate time. Nonliquid assets for example are house, land, and car.
Saving is the amount of money that we regularly
(usually monthly) take from our income for the
purpose of saving or investing.
The above terminologies will be used in the
following financial health check activities that we
are about to discuss.

Financial Health Check No.1 Debt Service Check

The debt service check is a measure to check how well our
capability to service or to pay our debt.
To do this check, we compare our Debt Service with our
Income. As given in the example, we have a debt service of Rp
8 million per month and an income of Rp 20 million per month.
With this situation our Debt Service Check is a ratio between the
debt service over the income, that is 8/20 which is equal to 40%.

Our Check

Debt
Services
40%

Other
Spendings
60%

An ideal and healthy value of a persons Debt Service Check

ratio is no more than 30%. A debt service check ratio below or
equal to 30% is considered healthy, otherwise it is unhealthy.
In this example, we have a Debt Service Check ratio of 40%
exceeding the maximum ideal number, it indicates an unhealthy
financial conditions as it means that we have a greater risk of
not able to service our debt, with the stated income level.
In this situation, we are strongly suggested not to add further
debt which, will add to our existing debt service obligations. A
recommended cure is by paying some of the debts principal in
order to reduce the monthly debt payment. Reducing our
monthly debt payment should reduce our Debt Service Check
Ratio to a better or ideal ratio.

Ideal
Debt
Services
30%

Other
Spendings
70%

Financial Health Check No.2 Bankruptcy Check

The bankruptcy check is a measure to check how close we are
to be in a condition of financial bankruptcy.

Our Check
One way to do this check, we compare our Debt with our Assets.
As given in the example, we have a debt of Rp 420 million and
lets assume that our current assets - including the cash, deposits, house, car, motorcycle, etc. have value in total of Rp 700
million. Our Bankruptcy Check is a ratio between the Debts over
the Assets, that is 420/700 which is equal to 60%.
An ideal and healthy value of a persons Bankruptcy Check ratio
is no more than 50%. A bankruptcy check ratio below 50% is
considered healthy, otherwise it is unhealthy. Theoritically, we
can only have debts in total of no more than the total assets we
have.
In this example, we have a Bankruptcy Check ratio of 60%
exceeding the maximum ideal number. It indicates an unhealthy
financial conditions as it means that we are having a greater risk
to a financial bankruptcy due to debt exposure.

Assets
40%
Debts
60%

Ideal

Debts
50%

Assets
50%

In this situation, we are strongly recommended not to add further

debt which will increase our existing liabilities. A recommended
cure is by paying some of the debts principal in order to reduce
the debt, in order to reach a better or ideal ratio.

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Financial Health Check No.3 Saving Performance Check

The saving performance check is a measure to check how good
we are in saving (or investing) our money from our income. At
the same time, this measurement could also give an indication
on how good we are in controlling our expenses out of our
income.

Savings /
Investings
5%

To do this check, we compare how much money we can

regularly save or invest from our Income. Lets say we can take
the money from our Rp 20 million income of Rp 1 million per
month for the purpose of saving or investing. With this amount of
saving or investing, our Saving Performance is a ratio between
the saving over the income, that is 1/20 which is equal to 5%.
An ideal and healthy value of a persons Saving Performance
Check ratio is at least 10%. The higher this ratio indicates a
better financial condition.

Our Check

Other
Spendings
95%

Savings /
Investings
10%

Ideal

In this example, we have a Saving Performance Check ratio of

5% below the minimum ideal. It is advisable that we should
strive to increase this ratio to meet the minimum ratio of 10%.
In order to increase our saving performance, we are
recommended to evaluate our spending to see if there are
unnecessary expenses which can be taken out or reduced,
where they can be then converted into saving or investment.

The result of our financial health check measure as

described earlier is then summarized in a table
below.
Financial Health
Check Measure

Our
Check

Ideal

Check
Result

Debt Service
Check

40%

Not more
than 30%

Unhealthy

Bankruptcy
Check

60%

Not more
than 50%

Unhealthy

Saving Performance
Check

5%

Not less
than 10%

Unhealthy

Looking at the table, now we know our financial

conditions, and the check results look all unhealthy.

So What?
If we are willing to make all the checks healthy,
than we can plan for it. Ways to achieve it are infinite depending on our specific-unique conditions.
Lets say we are willing to improve our financial
health and pursuing to achieve the ideal check
ratios. The following is one of the possible plan for
improvement:

Other
Spendings
90%

First, we envisage a period of one year to achieve

financial health improvement. Understanding the
time dimension in this planning is crucial for us to
be able measure; and to ensure our commitment to
achieve a financial health improvement. When we
know the time we would be having, we know what
we could do at our best.
Second, lets look at our Debt Service. For sure we
are not going to add more debt and consequently
its installment, with our Debt Service Check ratio of
40%! Therefore that is what we will do for the next
one year.
Next thing we need to do is to keep paying our debt
installment of Rp 8 million per month. That way we
can expect our total debt is to be reduced by
around Rp 60 million one year later; Our current
debt of Rp 420 million is then expected to go down
to Rp 360 million one year later.
Notice that our debt service for the motor-cycle will
also be ended ten months from now. Therefore our
current debt service of Rp 8 million per month will
also be reduced to Rp 6 million within the next
twelve months.

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House

Car

Motor-cycle

With this plan being executed, one year later our

financial measures would be expected to stack-up
just like in the following table.

9
8

7
6

Financial Measure

Current
Value (Rp)

A Year
Later (Rp)

Income (monthly)

20 million

20 million

Debt Service (monthly)

5
4

1
0

M0

M1

M2

M3

M4

M5

M6

M7

M8

M9

M10 M11 M12

Chart: Monthly Debt Payments, in million Rupiah

415

409

404

399

393

388

383

377

372

Debt

M1

M2

M3

M4

M5

M6

M7

M8

M9

367

363

M10 M11 M12

Chart: Projection of Debt by Month, in million Rupiah

Finally and going further, we will also commit to

reduce our monthly expenses by at least Rp 1
million a month by discarding expenses that are
unnecessary. Doing so will enable us to save or
invest that Rp 1 million, and making it a
commitment of Rp 2 million monthly saving out of
our income money. Subsequently, we expect an
increase of asset by Rp 24 million one year later,
making our total asset to around Rp 724 million a
year later.

Assets

700

M0

702

M1

704

M2

706

M3

708

M4

710

M5

712

M6

714

716

718

344 million

Assets

700 million

724 million

1 million

2 million

720

722

And in other word we have planned our financial

health on year later to achieve the following result.
Financial Health
Check Measure

Current
Check

Ideal &
Target

A Year
Later

Debt Service
Check

40%

Not more
than 30%

30%

Bankruptcy
Check

60%

Not more
than 50%

47%

Saving Performance
Check

5%

Not less
than 10%

10%

Now we can envisage an all healthy financial health

check measure within a one year of execution.
These healthier financial conditions would be
achievable with a strong commitment to improvement and in this example just by executing the
following actions:

344

M0

6 million

420 million

Saving (monthly)

Remember that we are expecting to receive an

annual bonus of about Rp 24 million within the next
one year. Remember also that we are committed to
improve our financial health and therefore we are to
allocate a larger sum from the bonus to pay-off
debts. Lets say we allocate two-third of the bonus
to reduce debts in the amount of Rp 16 million, and
for example it will goes to pay-off the house debt.
By doing so, we expect to roughly reduce further
our debt from Rp 360 million down to Rp 344
million a year later. The remaining of the bonus will
be spent on shopping items in our craving list.
420

8 million

Debt

1. Determine a clear time target;

2. Not adding more debt;
3. Keep paying the current debt services;
4. Allocate two-third of bonus to pay-off debts;
5. Reduce monthly expenses by Rp 1 million, and
convert it to additional saving.
We all can do this self-financial diagnosis to understand how well our financial health. We should
always do our best to improve all aspects of our
life, including financials. With a strong willingness
and commitment, an aggressive improvement
target to our financials is not unachievable.

724

By Iswin Hudiarto
The writer is Principal Financial Planner and
Director of Cikaldana Financial Advisory.

M7

M8

M9

M10

M11

M12

Chart: Assets Growth by Month, in million Rupiah

PT Cikaldana Korpora Sovereign Plaza 21st Floor, Jl. TB Simatupang Kav.36, Jakarta 12430
P: +62 21 2939 8727 F: +62 21 2939 8898 www.cikaldana.com E-mail: contact@cikaldana.com

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