Are You Financially Healthy? 3 Questions To Ask Yourself
Just as physical and mental health are crucial for a full and productive life, so is financial health. It’s the key to living the life you want. But how do you know if you’re financially healthy? There’s no equivalent to a physical health check-up. However, by understanding and managing your financial health, you can take control of your future.
The best route to financial health starts with a more holistic approach. Ask yourself these three questions:
1. What do you want to do with your money?
Your money-life connection should be driven by personal goals, desires, priorities, values, and needs. Most people use their money to pay the bills and buy food. But with the money left over, the possible variations become endless.
Consider your long-term goals:
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 a second home?
Do you want to plan and take significant family vacations every year?
Do you want to 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?
One pitfall you need to look out for in answering this question is to be aware of how we often tend 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. It’s important to make independent decisions that align with your financial goals.
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.
Creating a budget is the best way to understand how much money you need to make. 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?
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.
Spend some time thinking about the legacy you want to leave. How can you best further your dreams and goals? Then, consider working with a fee-only financial advisor toward specific steps toward your legacy. Here are some steps a fee-only financial advisor could take with you:
Education funding: If you want to pay for some of your children’s or grandchildren’s education, talk to a fee-only financial advisor about tax-advantaged savings such as 529 plans, which exist in many states.
Estate Planning: If you want to leave possessions or investments for your heirs, 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.
Trusts and foundations: If you want to start a trust, foundation, or charitable organization (or work with an already existing one), a fee-only financial advisor can advise you on 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 more the giving of funds?
Business succession: If you want to leave a business behind, contemplate how. 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 your plans, dreams, and goals, whether you have enough money to support them or need more, and assessing how best to leave behind the legacy you desire.
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At Prism Planning Partners, we are fee-only CERTIFIED FINANCIAL PLANNER™️ Professionals committed to facilitating important questions so that we can help you explore all of your opportunities.
We offer our clients a broad array of holistic financial planning and consulting services, including retirement, investment, and estate planning.