How to Self-Diagnose Your Financial Health

The New York Times Your Money section features consistently great advice from Ron Lieber and his team. (This team includes Carl Richards, who you may remember from his excellent blog Behavior Gap; Richards has contributed a couple of articles here at GRS in the past.)

Last week, Your Money featured an article from Tara Siegel Bernard in which the author explained how to self-diagnose your financial health. “We asked planners what they ask their clients during their annual financial physicals,” Bernard writes. “Their questions can help you diagnose your financial situation.”

Here are the eight questions she recommends you ask yourself during your financial check-up:

Is your net worth growing?

Your net worth is the total of your assets minus your liabilities. (So, if you have $200,000 worth of stuff but owe $220,000, your net worth is -$20,000.) I don't see much value in knowing my net worth, and I don't track it, which seems like heresy to some people. Many folks use net worth the primary tool to track their progress, and the New York Times article argues that it's one of the best gauges for measuring financial health.

How are your financial ratios?

According to the article, you can also track your financial health by looking at your debt-to-income ratio, your personal savings rate, and the size of your emergency fund. The article offers some guidelines for people at different stages of life. My recommendations? Keep your total monthly debt payments — including mortgage — below 33% of your gross (pre-tax income), and below 25% if possible; save as much as possible, but aim for 10% or 15% or more (my wife saves over 25% of her income); and aim to have enough money set aside to cover 3-6 months of expenses.

Are you spending more than you earn?

This question gets to the crux of personal finance. If you spend more than you earn, your cash flow is negative and you're losing ground. But if you can outearn your spending, you'll actually build wealth. The New York Times recommends that you track your spending to be certain you're not outpacing your income.

What changed in your life during the past year?

Life is fluid. People get married, have children, move, change jobs, get divorced, and, yes, die. All of these events can affect your financial situation. Plus, your own personal goals may change, leading to a shift in priorities. While it's important to have fixed financial goals, it's also important that you make periodic course corrections.

Are you still adequately insured?

We don't talk a lot about insurance around here (I don't know much about it, and when I bring in outside experts, you folks get cranky!), but it's still an important subject. Insurance is a vital part of your financial arsenal — it's there to protect against catastrophes. But as your life changes, your insurance needs change. Be sure to conduct periodic reviews.

Do you need to make changes to your estate plan?

Just as your insurance needs change with time, so do your needs for estate planning. As you accumulate wealth and build a family, things can become complex. The New York Times suggests reviewing your will (or other documents) at least once every five years.

Does your investment portfolio require maintenance?

The stock market has been going gangbusters for over a year now (although you might not guess that from the continued hysterical headlines in some corners), but that doesn't mean you should be pumping all your money into it. Instead, it's important to remember the lessons from the crash. If the wild swings in your portfolio caused you stress and worry, you may need to reconsider your asset allocation by moving funds to high yield savings accounts or other investments.

Have your goals or outlook changed?

Are you happy? “At its core, financial planning is not simply about money,” Bernard writes. “It is about finding the best way to finance what you want out of life.” This echoes a couple of elements of my core financial philosophy, and I think it's the key to maintaining financial health.

To read professional advice on how you should approach each of these questions, read the article from The New York Times.

While you're at it, check out their 31 steps to a financial tuneup, which is a customizable checklist of tasks that you can use to boost your financial health. (This tuneup reminds me of my own suggestion that you take a Money Day, a self-imposed personal finance workday, once a year.)

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