We all want to know how we’re doing. Most of us get an annual physical to proactively identify any looming problems and set a baseline for future tracking. Our financial lives should be no different. Here’s a ten point financial check list to see where you are and where you’re going. And unlike your physical, it won’t hurt a bit.
- Debt. Do you have consumer debt? If so, how much? At what interest rates? What is your plan for paying it off?
Green: You’re debt free! That’s obviously the best, it can make sense to have a mortgage even if you don’t need one, if you’re a disciplined investor. We have a mortgage that helps with taxes and liquidity and at 3.5 percent it’s hard to beat.
Yellow: Debt on assets that make you money such as rental properties that have lots of equity and can easily be paid off if you choose. (I still owe a small amount on a rental house I purchased during the financial crisis. It makes sense for now to keep it.)
Very low interest student loan debt. Many people in the FI world will play interest rate arbitrage and keep low-interest student loans. It can make sense financially, but you have to be disciplined and not just spend the money. It’s best for 95% of people to pay it off if you can.
Red: You have typical consumer debt of any kind. Car loans, credit cards, personal loans all equal a high warning factor for your financial health.
- Emergency Funds. It’s hard to feel secure without one. It’s even better to have F-U money where you can quit at anytime. This should be kept in cash somewhere like Ally or CapitalOne.
Green: One year of essential living expenses. Not luxuries but the barebones.
Yellow: Three to six months of essential living expenses.
Red: Anything less than three months. If this is you, you’re not alone. Nearly 70% of adults have less than $1,000 in their savings accounts. Ouch.
- Awareness & Spending. Do you track your net worth? Do you know if you’re on track for your goals? Do you know your “number”? Do you have a budget that you track monthly to align with your goals and values?
Green: Using a tool like Mint or Personal Capital to track your spending, investments and net worth monthly. Aware of your values and goals.
Yellow: Aware of some goals, like retirement, but not fully aware of spending or investment allocation or performance.
Red: “As long as I don’t bounce a check, I’m fine.”
- Retirement Saving. Wether you’re like me and your goal was early retirement, or you’re happy to work as long as you can, you should be saving for retirement, preferably in tax advantaged accounts. I believe most retirement calculators are wrong and overstate what you need, so don’t get discouraged.
Green: Saving enough to meet your goal (25 times your annual retirement spending is a good rule of thumb.) At minimum 15% of your income.
Yellow: Saving below 15% but still saving. Or saving 15% even though you’d like to retire early.
Red: Nada. But you’re not alone. In fact, about half of US families have zero retirement account savings. Another ouch.
- College funds. If you have kids, you’ll probably want to pay for some of their college education. This is a hard one because by the times my kids graduate from high school things may be very different. I don’t believe college costs can keep rising the way they have, and I also think hacking college is a smart way to go, but still I have saved for both of my little boys.
Green: You’re filled out one of these handy calculators, didn’t have a heart attack and are saving monthly, or have front-loaded a 529. I have 529s that I front loaded a bit when both boys were babies and I was at my gonzo corporate job. While we still contribute monthly to the set goal, I don’t expect to keep doing that as I don’t want “too much” in a 529 for various reasons I’ll unpack in a different post. Also, as both of us become FI in the near future, we’ll want to cut down on spending. Fidelity has the 2k rule of thumb that says if you have the kid’s age times 2k, you’re doing well. So for my 4 four old, that’s $8k. Seems low but there are so many variables at work here.
Yellow: Less than the $2k rule.
Red: You keep thinking you’ll set up one of those 529 plans one of these days. (But honestly, I think college will be so different then who knows what your kid may or may not want to do.)
- Other savings. This depends upon your goals, but the simple path to wealth is to spend much less than you make. That means extra saving outside of retirement or emergency funds into a taxable brokerage account where you purchase index funds.
Green: You have a goal and actively save outside of retirement or emergency funds and invest monthly. Real FIRErs save 50% of what they earn.
Yellow: You save but keep it in cash.
Red: “I can’t even save for retirement or pay my bills.”
- Passive income or other revenue streams. This may just be dividends and interest from your total investable portfolio, a side hustle like driving for Uber, real estate or P2P lending. The key is to have other sources of income. I believe this can make more of a difference for most people in achieving FI because it gives you more certainty that you can quit your 9 to 5 and still make money, without being dependent on investments alone. Even if you’re not here yet, just thinking about this can bring opportunities your way.
Green: You have and track revenue from two sources besides your “regular” income. Or you’re saving towards buying a rental or other investment.
Yellow: You don’t have other sources of income, but have thought about it and have ideas around your hobbies or skills.
Red: “I don’t even have a center hustle.”
- Giving. True wealth involves sharing, even if only for selfish reasons. It boosts happiness and can give you motivation for saving or making money. This could be to charity, your place of worship or to family members who need support.
Green: You actively give or have a plan on when/how you when you achieve financial milestones. You track it as a percentage of your spending.
Yellow: You only give because you feel “should.”
Red: “I’m my own charity.”
- Protection and risk liability. We must be intentional with protection of our assets and planning for the future. This is highly dependent on where you are in life. Single with no dependents and very low net worth? Your needs are small. Dependents and net worth over $1m, especially in non-retirement accounts? You need life insurance, personal umbrella coverage and a living trust. The most important aspect is intentionally preparing.
Green: You have adequate life, disability and liability insurance for your situation. You have a trust or will to help your family make sense of your estate.
Yellow: You have some insurance, probably through work, but haven’t thought that much about it. May only have a will even though a trust would be better.
Red: “I don’t need no stinkin’ insurance.”
- Happiness. Life isn’t all about money. If you’re too attached to money or gripped by obsessive thoughts, it’s no bueno. There can be a middle-path where we have awareness of what we’re spending and how we’re working without too much gripping and extra suffering. Take time to check in on your overall happiness around money. Is it a hindrance or a help? Are you telling yourselves untrue stories around money that mask something else?
Green: You have awareness and understanding of the true nature of your financial lives and you make decisions on saving, spending, and working based on your own values.
Yellow: You’re not obsessive, but you could spend some time thinking about things deeply and honestly. You sometimes make purchases or decisions based on what you “should” do or what others do.
Red: You spend all your waking time thinking about money, or you think you’ll be happy when/if you hit some financial milestone. Unfortunately, that treadmill never stops.
So how did you do? Ultimately, comparing ourselves to others (or even to lists like these!) isn’t that helpful, yet people want to know how they measure up with tools like this. Comparison to others and external validation is the thief of joy, as they say, as it takes us out of our own experience.
True financial independence isn’t a number. It’s being content with what you have and living in integrity with your own values. Pausing to take an internal inventory can give you the confidence and tools to achieve goals.