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Time for a financial checkup

By Kemberley Washington · Bankrate.com
Thursday, December 27, 2012
Posted: 1 pm ET

As we strive toward financial goals -- whether they are to reduce debt, save more or simply make ends meet -- it is essential to check ourselves along the way.

Understanding your net worth is key. Earning a paycheck is great, but true financial success comes from saving some of the money you earn. Prepare a net worth statement, which is simply a listing of all your assets minus liabilities. That amount represents your net worth.

Your current financial situation will determine whether you have a positive or negative net worth. If your liabilities exceed your assets, you will have a negative net worth. Take steps to increase your savings or reduce debt to increase your net worth over time.

Do the math

There are many personal finance ratios that can give you a gauge to help you understand your financial strengths and weaknesses. Consider computing your current ratio. You can do so with the following formula: current ratio = current assets -:- current liabilities.

The current ratio signifies your ability to pay short-term debt, such as credit cards and other debt due within a year. Current assets include short-term assets such as cash and cash equivalents, certificates of deposit and money market accounts. Current liabilities include short-term debt.

A current ratio of more than 1 signifies you are able to pay short-term debt using liquid assets. However, a ratio of less than 1 means you are not in a position to do so. If you find yourself with a ratio of less than 1, consider saving a little more to increase your current ratio.

Are you saving enough?

No matter how much you set aside from each paycheck, it is important to stash something away. Financial wisdom encourages us to save at least 10 percent of income or stash at least three to six months' worth of expenses into a liquid account, such as a savings or money market account.

However, 28 percent of Americans do not have any money set aside for emergencies, according to Bankrate's June 2012 Financial Security Index. If you have nothing in your savings, take action to start putting small amounts toward your goals.

Consider creating a budget to identify amounts you can put toward savings. Set up automatic savings to help you save with little to no effort. As time progresses, increase your savings by putting more away.

Remember: your choice, your future!

Kemberley Washington is a certified public accountant and a business professor. Subscribe to her personal finance blog at Kemberley.com, or follow her on Twitter.

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