Financial Wellness Check up

What would a financial wellness check uncover about you in a new year? Many people schedule their health and wellness checkups at the start of the new year. Did you know that January is Financial Wellness Month? Safe to say that we should also apply the thought process around physical health to your financial health — by way of a financial wellness check!

Here are a few financial wellness issues and why a financial wellness checkup can be powerful.

Financial wellness builds on a solid financial foundation

These are a few of the questions I ask during our assessment of the foundation of your financial wellness

  1. Do you have 3 to 6 months of monthly expenses sitting in FDIC cash?
  2. Debt
    1. Is your housing expense ratio1 aka front-end ratio less than 28%?
    2. Is your debt ratio sometimes called back-end ratio less than 36%?
  3. Do you have a plan to cover your monthly expenses in case you are disabled?
  4. Do you have life insurance that replaces all of your paychecks from now until you retire?

Debt management is key

If you decide to go for a mortgage the bank has a couple of financial wellness checks. They are your debt to income ratios for total credit (debt ratio, back-end ratio) versus mortgage debt (housing expense, front-end ratio). Many people call debt used to acquire a college degree good debt. While on the surface that may seem like a good idea that debt should be viewed in terms of return on investment.

For example, if you acquire a degree for which there is little demand then how will you pay for the debt? Credit cards make paying for things convenient. However, if you don’t pay off the bill at the end of the month, the interest makes what you purchased more expensive. Unfortunately, you may keep getting credit card offers until you no longer can make the payment. Debt payments don’t make the individual more financially well-off. That includes paying your mortgage. My parents sold their house for less than what they bought it for!

Emergency reserves or rainy day funds

One of my clients, a married couple, calls this their “six months to live” fund. What should you do if you are unemployed? Some people think that they could receive unemployment insurance. Depending upon your circumstances this may not be a reality. Even if it is a reality, how much money will you actually get from unemployment?

I’ve had friends who were unemployed for more than six months which historically was the logic behind having six months of reserves. You should assess your situation and how likely you might be unemployed.

You should think of this in terms of the best case a worst-case. I believe you should target the worst-case which you may have been a bit optimistic in assessing.

Risk management

Besides the risk of unemployment, you face the risk of your car being totaled by someone who doesn’t have insurance, (it happened to me), facing a disability by no fault of your own (it happened to me), and death before a fully funded retirement (has not happened to me). These are just a few of the risks. Hoping that it won’t happen to you or believing it’ll happen to other people is not a plan!

There are insurances to help guard against the catastrophic impact of these events. When assessing the catastrophic nature of one of these issues you should find out how likely the event is to happen and then multiply it by the cost (think of the total loss of your house by fire).

However, you should make that decision in terms of a plan and what you would do in case that happens. Family members or loved ones, who may be impacted by these events, should be privy to the action plan.

Enhancing your financial wellness

A few more questions to consider:

  1. Taxes
    1. Do you know your effective federal income tax rate?
    2. Do you have a plan to reduce and/or pay for estate and gift taxes when your wealth transfers?
  2. Retirement Lifestyle Goals
    1. Building your nest egg: Do you know how much you need to save and get what rate of return to creating the retirement nest egg needed to live your chosen lifestyle?
    2. Do you have a plan to turn your retirement nest egg into a life-long retirement income?
  3. Financial Life Goals
    1. Do you know how much you need to save, at what rate of return to reach your goal(s)?
    2. If so, is that what you achieved over the last 3 years?

A financial wellness action plan

How well have you done in answering yes to the questions listed so far? While this is not an exhaustive list, it does highlight a few issues that many of us face. You should actually have an independent assessment of your financial wellness done. Most of us tend to be overly optimistic. So I recommend that you seek out a CERTIFIED FINANCIAL PLANNER™ professional to help look at your particular situation.

Learning where you’re at today and determining a plan is the best way to get yourself to a better state of financial wellness. If you would like us to send you a copy of your assessment, please contact us. We want you to be financially healthy in this new year no matter if we are the right adviser for you or not!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly.

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