How do you know if you’re doing okay with your financial situation?
This is a simple question with a complex answer.
But I’m here to provide a straightforward 6 point checklist to ascertain your financial health.
If you answer yes to all 6 questions, you’re in the pink of financial health!
This isn’t new or revolutionary – check out the FOO – Your Ultimate Guide to Money Guy’s Financial Order of Operations | Money Guy for a US version of this.
1. Are you spending less than you are making?
This is the key question. If you are spending more than you are making consistently, then there is no way to build wealth. You need to make more and spend less, and do so now.
Debt is a like a snowball, and the longer it goes on, the harder it is to stop.
There are times in life when your spending outpaces your earnings. This often happens earlier in life when big, costly life events like marriage, house-buying, and family formation takes a lot out of you.
If you are currently spending more than you are making, including the cost of paying any debts you have, then you need to take a hard look at your spending. I guarantee you there are subscriptions you don’t need, eating out that you don’t have to do, or material purchases that aren’t necessary. Cut those quickly, before the debt snowball rolls out of control.
2. Do you have high-interest debt?
Any debt with interest above 7% annual is high-interest. This is especially true for risky loans like credit card debt and personal loans. The cost of this debt snowballs quickly, doubling every 10 years for a 7% loan. Credit card interest often exceed 25%, doubling every 3 years!
Focus on paying this down ASAP – this reduces future debt burden and gives you more breathing room to save in the future.
3. Do you have 3-6 months of expenses saved for an emergency?
Emergency savings are for unforeseen expenses. They could be for medical incidents, critical repairs, or a sudden job loss. Without this cash cushion, you will face significant hardship if you suddenly need to cover a big expense. You would have to turn to credit card debt or liquidate your investments – both of these are recipes for financial fragility and destruction.
Accumulate these savings, and stash this emergency fund somewhere where you know you won’t touch it. No, a new iPhone is not an emergency
4. Are you saving 10% of your income every month?
Once you have established an emergency fund, you need to save for the future. There will be other large expenses in the future that need to be funded, like children’s education. Without these savings, you are headed towards a retirement of scarcity and poverty.
A common rule of thumb is to save at least 10% of your income every month for your future retirement.
Check out my guide on saving here.
5. Are you insured?
Insurance is a necessary evil. Life is full of left tails, or unlikely but terrible outcomes that can destroy our future plans in one fell swoop. Insurance is a way of protecting us against these left tails in exchange for a fixed monthly/yearly payment.
There are many types of insurance, but the main ones to get are the ones that the government opts us in by default. These would be:
- Term life insurance
- Hospitalisation insurance
- Long term disability care insurance.
If you cannot be insured due to pre-existing conditions, then we need to bulk up our own emergency savings to compensate for this. Consider having 12 months in expenses saved up instead of 3-6 months.
Once you have taken care of these 3, we can move to the final step in the checklist.
6. Are you investing your savings (non-emergency) for your retirement?
Finally, once you have built up a steady savings habit, invest your savings to take advantage of compounding. Bank accounts are extremely risky when saving for retirement, having returned very little in real terms.
But an investment that grows at 5% a year for 40 years will grow to seven times its original amount.
Check out my guide on investing here.
What’s next?
If you have answered no to any of these questions, then you know where your financial health is lacking, and what steps to take to address them.
If you answered yes to all 6, then you, dear reader, are doing okay with money. My sincere congratulations. Go forth and live a fulfilling life.
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