Just like monitoring your physical health, there are certain financial metrics you can use to track your financial health. But what does it actually look like to be financially healthy? Your financial health is a measure of your ability to reach your long-term goals, handle unexpected financial burdens, and meet the regular requirements of your lifestyle. There are several characteristics we often use to assess someone's financial health. Whether you feel like money controls your life or you are wondering if there are things you can do to make yourself feel more secure in your financial future, here are five considerations to see where you stand.
Make Sure You Have Enough Cash on Hand to Handle a Major Unexpected Expense
According to a report from LendingTree, 49% of U.S. adults say they do not have enough money to cover a $1,000 emergency expense using only cash on hand. That means these individuals would have to take on debt, withdraw from a tax-advantaged investment account and possibly bear a penalty, or ask someone for help.
In financial planning, one fundamental is to set aside three to six months' worth of expenses for a rainy day. Considering that somewhere along the way, it is a near certainty that you will face some form of financial adversity, it is worth taking the time to identify your Sleep Well At Night (S.W.A.N.) dollar amount. In other words, how much money should you earmark for emergencies to help you sleep better at night knowing you can weather a storm? Check out our blog post, where we go into depth about emergency funds.
Make Sure You Understand Your Cash Flow – Where is Your Money Coming From and Where Is It Going?
Understanding your income and expenses and being organized and methodical about allocating your money is crucial to your financial wellness. This is equally important whether you feel like you are 'just getting by' financially or if you have breathing room every month with money to save.
This should come in the form of a budget that details your income and expenses. Laying out this information can help you coordinate your financial life with your long-term goals and objectives. During the course of detailing your cash flow, if you find that you are spending more than you take in, it is imperative that you craft a plan on how to bring down your spending. If you find that you have additional funds at the end of each month, this opens up all kinds of possibilities for saving and investing in order to grow wealth and take care of your family.
Make Sure You Have Financial Goals and a Plan for Success
One of our first discussions with clients is about their goals and objectives. It could be retiring at a certain age, managing debt, saving for kids' education, saving for a down payment on a house, taking care of aging parents, saving for a family milestone like a wedding, protecting your assets, etc. Just as it is essential to have these goals, it is equally important to have a strategy for making them a reality.
If you have multiple goals, you may not be able to achieve everything on your list. Sometimes, goals conflict and interfere with each other. For example, you may want to save for your kids' education, but that may mean you do not have enough leftover to save for retirement. Crafting a clear path forward may require prioritizing these goals and/or making difficult changes to your lifestyle. By having clearly defined goals, prioritizing those goals, and a strategy for achieving them, you are setting yourself up for success. Once you have that in place, you just need to implement your plan and you will start to see positive change in your financial well-being.
Make Sure You Think Through and Plan for Potential Life Events
It is no fun to dwell on difficult or unfavorable circumstances. Often, an unwillingness to prepare for unforeseen life events could leave you vulnerable to financial ruin. Proactively thinking through potential life events that would adversely affect your finances is an essential exercise to protect the wealth you and your family are building. This includes having an emergency fund, which we discussed above, but it encompasses much more. For example, take a look at your insurance policies (i.e., health, life, homeowner's, disability, etc.) to ensure you have adequate coverage. It could mean examining the beneficiaries on your investment accounts and life insurance to ensure that they are up to date. It might mean finally getting around to having your estate planning documents drafted or updated.
Unfortunately, not thinking about negative situations that may come up in your life will not prevent them from happening. Taking the time to do a little worst-case scenario planning will significantly benefit your financial health and may even help you sleep better at night, knowing that you are protected and prepared.
Make Sure You Take Advantage of Wise Asset Location
Many conversations about investment planning center solely around what investments will make you money. It could be the hottest stock everyone is talking about, index investing, real estate versus traditional investing in stocks and bonds, etc. All too often, the conversation does not include how to hold these investments – it only focuses on whether you have them or not.
Taking advantage of asset location strategies that align with your financial goals can significantly help you achieve those goals, minimize taxes, and make smart money moves. This may include holding low-cost, low-turnover stock funds and tax-efficient bonds in taxable accounts. It may mean utilizing a 529 savings plan for education savings. It may also mean analyzing whether contributing to a pre-tax (traditional) retirement account or Roth account is better for your tax and retirement goals.
If you need help assessing your financial health, check us out! You can schedule a complimentary, no-obligation call with us here.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.