Financial health is as important as physical and mental health. Without it, you’re unlikely to be living a full and productive life. But how do you know if you’re financially healthy? After all, there’s no equivalent to a physical health check-up, where the doctor uses a stethoscope.
Instead, the best route to financial health starts with a more holistic approach by asking yourself these 3 questions and then charting your financial course according to the answers.
1. What do you want to do with your money?
To live a healthy financial life, the first thing you should decide is what you want to do with your money. Your money-life connection should be driven by personal goals, desires, priorities, values, and needs. Most people pay the bills and buy food with their money. But with the money left over, the possible variations become endless.
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How much money should you be saving for retirement? Do you have a firm sense of how much money you’ll need for the retirement you want? Do you want to build a second home? Plan and take significant family vacations every year to build memories and togetherness? Run a business? Take the time to sketch out your financial goals and whether you’re in line to achieve them.
Many times, accessing your goals and dreams will constitute more of the work of assessing your financial health than you might think. Think through where you want to be in 5, 10, 20, 30 years, and beyond. Where do you want to be, what do you want to be doing, how do you want your financial future to be?
This work is crucial because oftentimes we all may have a tendency to follow our peers. The answer to the question “what do you want to do with your money” could be what your neighbors or business colleagues do with their money, whether it’s buying a boat or flying your children to sports league training. But doing what your peers do does not necessarily increase or maintain your financial health.
2. How much money do you need to make?
Whether your money comes from salaries, income or investments, review whether you are making enough for the ways that you want to spend it. If your monthly income doesn’t cover your goals or wants, that’s a recipe for financial ill-health — because it will either cause you to go into debt or draw from your savings and investments.
The best way to understand how much money you need to make is to create a budget. Start by keeping track of everything you spend. Then, once you have a week’s worth of expenses, divide them into categories (mortgage/rent, groceries, utilities, transportation, eating out, student loans – and any other categories that you have, which your spending will reveal).
Add up each week’s totals and put them on a spreadsheet (or in a software program). Once you have the monthly totals, compare them with your spending. Do you spend too much compared to your income? That can happen whether you make $35,000 per year or $250,000. If so, the budget can help you determine where spending can be reined in.
Or, do you have disposable income every month? (Disposable income is money beyond basic expenses.) If so, you can choose where to direct it to meet your goals. Retirement savings? Savings for emergencies?
Many financial advisors recommend keeping from three to six months’ worth of spending on hand for emergencies like a sudden car repair. Planning for travel? A nest egg to start your own business? A down payment on a second house?
If you find that you aren’t making enough to reasonably plan for your goals, you can strategize your way to financial health by developing a plan to make more (or spend less). You need income streams to fund your goals and dreams.
3. Are you on track to leave the legacy you want?
Most people’s dreams, goals, priorities, and values involve leaving a legacy behind – whether it’s supporting the education of the next generation(s), bequeathing precious possessions to your heirs, a foundation, trust, or charitable organization doing work for the community or a business or organization that you built passed to the next generation.
First, spend some time thinking about the legacy you want to leave. How can your dreams and goals best be furthered?
Second, consider working with a financial advisor in Libertyville, IL toward specific steps toward your legacy. For many legacies, you’ll need to work with a financial advisor.
If, for example, you want to pay for some of your children’s or grandchildren’s education, talk to a financial advisor about tax-advantaged savings such as 529 plans, which exist in many states.
If you want to leave possessions or investments for your heirs, make sure you work with an advisor on an estate plan. A Last Will and Testament is a crucial component because without one, you are not assured that the heirs you want to receive certain things will receive them. In addition, your possessions and funds (unless they are held in joint accounts) could be stuck in probate for up to a year.
If you want to start a trust, foundation, or charitable organization (or work with an already existing one), a financial advisor can advise about how best to get started. Do you want to actively work with trustees and administrators of foundations or charities, or do you see your role as being more the giving of funds?
If you want to leave a business behind, contemplate how best you can do that. Discuss with family members whether they have an interest in the business, first. You don’t want to involve them in something they don’t want! If they do want to become involved, work with them and appropriate advisors on how best to bring them into the business.
If you want a business to be your legacy and family members are not interested, consider whether you want to groom existing employees to run it or to sell it.
These three questions will help ensure your financial health, by giving you a firm grasp of the plans, dreams, and goals you have, whether you have enough money to support them or need more, and assessing how best to leave behind the legacy you desire.
At Prism Planning Partners, we are CERTIFIED FINANCIAL PLANNER™️ Professionals committed to facilitating important questions so that we can help you explore all of your opportunities. We offer a broad array of holistic financial planning and consulting services for our clients-including retirement, investment, and estate planning.
Contact us today and let us illuminate your possibilities!