Checkups help you evaluate a state of health. That state of health could be your physical, dental, or financial.
Getting a check-p helps you figure out what needs to be done next to prevent negative experiences looming on the horizon.
Checkups are not for the young or old. Many diseases compromise the health of a young person as easily as old.
However, the sense of financial urgency increases as we get older. Those in their thirties may think that they have decades before they have to worry about retirement. Those in their fifties feel the pressure more acutely.
Regardless of age, a hard look at finances, and the behavior that connects with it is helpful.
To avoid analysis paralysis, here are five questions to keep you focused and moving.
1. How much retirement savings is enough? Will the savings trajectory lead to a comfortable retirement life? What steps can you take to increase your monthly savings? Fortunately, you do not have to guess; there are financial calculators to help you answer these questions.
Some work with a projection of 80% of their before-retirement income as a benchmark of a comfortable after-retirement income. This idea ignores negative habits of increased expenditure that goes with higher income. A more reliable method is having a budget that identifies needs and wants. Needs are fixed and non-negotiable expenses like shelter and food. Wants are adjustable discretionary expenses.
2. Do you have enough diversity in your investments? Risk is part of any investment. Diversification helps limit the risk of financial loss. Diversity can also create combinations of income and growth for safety and hedging against inflation. Real estate, stocks, bonds, and precious metals are examples of diversification.
3. Are you taking advantage of tax savings and tax-deferred accounts? 401(k) plans, IRA, and before tax health care savings accounts are examples of steps that can help you reduce your taxes now and defer taxes on your earnings until later.
Also, in some cases, holding on to stocks more than a year before sale moves the sale to long term capital gain instead of short-term. Long term capital gain may carry a lower tax rate.
4. Is being debt-free part of you your attitude and actions? Debt eats away at your peace of mind and your finances. Controlling and managing your attitude toward debt is a skill that must be developed. Many approach debt like a weight loss diet. They go on a strict diet for a few days, lose a few pounds, and then they let go and gain all of it back and then some. Planning, coaching, and accountability help many lose weight and keep it off. In similar ways, you may need planners, coaches, and accountability to pay your debt and keep it off.
5. Do you want to leave something behind? If you have the luxury of thinking beyond retirement, think of your estate and how you want to distribute it to those you are leaving behind. Estate planning goes far beyond the distribution of assets. It also addresses medical incapacity and care.
These hard questions may have simple and affordable solutions if you deal with them soon and when you do not need to.
6. Do you have an appropriate amount of insurance? Insurance in its purest form, delegating the risks that you cannot afford to carry yourself to insurance companies. The cost of premiums increases as you delegate too much. A low deductible is an example. The risk to you increases as you transfer too little. You need to know how much risk you can afford to take. Also, make sure that your policies are up to date and you haven’t lost a payment in the mail. Health, home, ability to earn a living, and legal protection are examples of insurance policies you may need.
Always work with an insurance professional to address your needs.
This quick financial checkup helps you keep on track. Finish the steps and review it yearly. It is your life, your future, and your responsibility.