Is Your Financial Life on Track? Take This 10 Minute Financial Audit

If you know that you are not in complete control of your life, it is a good idea to listen to the discussion in the following article. Life is hectic. Day to day chores, work, and family obligations can keep us from our longer term aspirations. We may have goals that we set up at the beginning of the year or a timeline that we want to accomplish as we move through certain stages of our life, but these targets can seem elusive, if we do not occasionally take a realistic assessment of our progress. Perhaps, a quick 10 minute financial audit is a good place to start.

Take ten to reflect on your financial life and measure your financial “pulse” to see if you are in decent financial shape. Here are a few quick and easy questions for you to ask yourself to complete the review:

First, are you prepared for a catastrophe?

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We all have family members, coworkers, and friends who have experienced a job loss, death, or disability. We tend to think naively that a similar event would never happen to us; but unfortunately, we are not immune from hardship. Ask yourself the following specific questions.

  • Is your job secure? If not, do you have at least 6 months cash to cover your expenses until you can find employment?
  • If you or your loved one were to die, would there be sufficient insurance to cover your future living expenses such that you could maintain your current lifestyle?
  • Do you have an updated will and other estate planning documents or would there be chaos or confusion among your family members upon your death or incapacity?
  • If the primary earner was to become disabled, how would you cover the lost income from his or her salary?
  • If you have group disability, will the after tax benefit be sufficient to pay your monthly living expenses? (Disability benefits for which premiums are paid with pretax dollars are taxable, whereas benefits paid with after tax dollars are tax free).
  • Even if you were to cover the basics through a disability policy, would you be able to still save for retirement?

These are tough questions to ponder, but very important to consider, just in case the unthinkable happens. The probability of a disability is very real. Statistics show that just over 1 in 4 of today’s 20 year-olds will become disabled before they retire, and that of the 37 million disabled Americans(in 2013), 50% are in their working years (age 18-64).*

In fact, a typical non-smoking female, age 35, 5’4″, 125 pounds, who works in an office job with some outdoor physical responsibilities, and who leads a healthy lifestyle, has a 24% chance of becoming disabled for 3 months or longer during her career with a 38% chance that the disability will last 5 years or longer. The typical male has a 21% chance of becoming disabled with the same rate as females of a long term disability (38%).* Of course, the risks are higher for people who do not live a healthy lifestyle.

If you can’t answer the questions above, or you are concerned that you are not protected in the event of an unforeseen circumstance, you need to focus on risk management. You should immediately look into additional insurance coverage to protect against these events.

Second, are you moving closer to your important life goals?

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If you need to purchase a car or other large purchase in the near future, are you gradually saving money in a separate savings account so that you can pay for your purchase in cash?

Are you contributing annually to your kids’ college funding accounts?  It is best to start as early as possible so that you save less each year. If you wait until the kids are in high school, there are fewer years to save and the process will be much more onerous. Time and dollar compounding make the process easier requiring that you save less over time.

Are you saving at least 10% of your salary (not including your employer contribution) for retirement and are you on track to retire? (A basic rule of thumb is for a retiree to amass roughly 15 times their income by age 65. By age 50, you should have about 6 times your income saved; and at 40, 2.5 times your income saved.) If you are behind, you will need to save more than 10%.

Third, do you understand what your invested in and why?

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You should primarily be aware of how much exposure to the stock market you have and if that makes sense given your age, goals, and investing personality.  Ultimately, you should have a low cost, diversified portfolio of funds that you can stick with, even in the event of a very large market correction.

You should also not be paying high fees for investment management and for “active” funds. If you think you are paying too much or are worried you have too many accounts that are spread over several investment companies, you would likely benefit from cost reduction, consolidation, and simplification.

Finally, do you have anxiety over any aspect of your financial life?

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If there is something that is bothering you, it is important to address it quickly and thoroughly so that you can sleep better at night. Furthermore, if you are the kind of person that would find it hard to quickly pull together your key financial documents such as recent tax forms, investment statements, and insurance policies, you will likely benefit from some financial housekeeping and coaching. Awareness and intention are important elements for financial success.   To this end, you may find that working with a financial advisor or coach is a great way to improve and enhance your financial security.

The financial planning process is a great way to create a roadmap for your financial life. Working with a fee only CERTIFIED FINANCIAL PLANNERTM professional is a great place to start. The planner can put together a comprehensive plan and then meet with you to review the plan on at least an annual basis.  For my clients, each year I provide a color coded financial “report card” that measures progress toward specific financial goals in all areas of their financial life—insurance, cash flows, college planning, retirement planning and estate planning.

We also review their portfolio, and discuss market valuations and the very real and ongoing potential for markets to correct. This ensures that the client is mentally and emotionally prepared for market volatility and protects them against irrational behavior at market peaks and troughs. A tax checklist is also reviewed to see if there are opportunities to reduce taxes, both in the short and long term.

Annual reviews are an essential part of the financial planning process. They provide feedback on progress and direction in response to changes in financial markets and retirement and tax legislation. Most importantly, they provide moral support and encouragement for the client. The review forces clients to focus on their finances in an intentional way.

I once told one of my long term clients that since she had been coming in for years and her plan was in good shape, we could move to less frequent reviews, say every other year, if she wanted. She commented that she was happy to pay the fee for more frequent reviews, as it forced her to pull her information together and give it a good look every year. This annual exercise was meaningful for her and well worth the time and investment.

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