So many of the questions that I get asked as a financial educator can be narrowed down to this: “How do I know if I’m financially where I should be?” We all want to know if we are doing it “right” and are actually on track to meet our desired goals.
The best way to answer this question is to take a judgement-free spin through your numbers: income, day-to-day expenses, emergency savings, debt repayment, and retirement savings. They will help you realistically assess where you are on the path to meeting your financial goals. Next week I’ll use the results of this week’s audit to help you set one specific financial goal for 2020.
As you embark on this financial audit, I encourage you to set aside a few hours on a weekend afternoon or break it up into bite-sized pieces until it’s completed. Make it fun by rewarding yourself with your favorite beverage or sweet treat. And do your best to make sure your partner is involved along the way. If you can, do the work together. If not, be sure to set aside an hour to talk through the results.
Let’s dive in:
· Income: You may not think to start here, but this step is very important. Make a list of all of the income you have coming in. Whether that’s the paycheck from your employer or money from any side gigs, no amount is too small to add in. This is an especially important step if your income isn’t the same every month.
Check your progress: As you might expect, there’s no one income amount that works for everyone. Instead, I encourage you to see if what you’re making matches what your time and skills might be worth in the marketplace. Take the time to do a little research on websites like Glassdoor or Paysa and consider asking for a raise or raising your rates if you are freelancer.
· Day-to-Day Expenses: Examine your bank account. Are you paying all of your bills on time? Do you have money left over at the end of each month? If you use a budget, this is a great time to see if your estimates are accurate and make adjustments as necessary. If you use credit cards for your day-to-day expenses, are you paying those bills off every month?
Check your progress: The big question here is: Did you spend less than you earned while meeting all of your obligations? I use Mint to help me stay on top of my day-to-day expenses. One of the features I really appreciate is that I can easily look back to see which months were marked as “green” (we were under or on target for our budget) and which months were “red” (over budget).
· Emergency Savings: Take stock of the money you have set aside specifically for emergency savings, whether it’s in your bank account, high-yield savings, or investment account. It may be tempting to double dip and include money you have saved for other goals (like retirement or travel) as your emergency fund. But if that money is already earmarked for a specific goal, it’s not likely to be there when you need it and even if it is, using that money in an emergency can set you back to square one on that goal.
Check your progress: First, see if you have enough to cover your short-term needs (generally $1,000 kept close at hand in a bank account) and then see where you are at in terms of your longer-term savings needs (generally 3-6 months of expenses). Wondering exactly how much you’ll need for both? Check out this article.
· Debt Repayment: Get a clear picture of the total debt you owe, if any. Write down the amount owed, monthly payment, type of debt, and interest rate. If you have a specific repayment plan that you’ve been working toward, make sure to chart that as well. If you can, calculate the amount of debt you paid off over the course of 2019.
Check your progress: Are you just paying the minimum amount each month, or are you making concerted progress toward getting out of debt? If you have multiple debts, are you making the most progress on the ones with the highest interest rates?
· Retirement Savings: Take a look across all of your retirement savings accounts — including IRAs, employer plans, and any other investment accounts you and your spouse plan to use for retirement. You should be able to answer these questions: What percentage are you, your partner, and your employers contributing? What investment mix do you have? And finally, what’s the total balance?
Check your progress: I really appreciate Fidelity’s guide that as you approach retirement, you’ll need “x” times your current salary: by age 30, it’s 1x, and by age 40, 3x your salary at that age. They also suggest that between you and your employer, you set aside 15% of your income total for your retirement. This Nerdwallet article can help you better understand your investment mix and see if it’s right for your goals.
Have other financial goals you’re working on, like saving up for a house, building your child’s education fund, or preparing for a baby? This Thursday, Jan. 9, I’ll be going Live on Facebook at 8pm Central to help you check your progress on these important goals and more! Only have Instagram? Don’t worry — I’ll be posting the recording to IGTV later.
P.S. – In preparation for my Love & Money brunch, I’m giving away a free ticket for one lucky couple! On Facebook? All you have to do to enter is share the link to the event, tag me and at least one friend. On Instagram? Comment on this post (or share that post in your stories) and tag at least one friend. Feel free to share it as many times as you like. I’ll be drawing the lucky winner during my live on January 23rd!