1. If you lost your job, would you panic?
Let’s say you woke up tomorrow and lost your job. Would your initial reaction be panic or relief?
Most people would immediately experience panic because they are, unfortunately, living paycheck to paycheck and above their means.
I recall leaving a job and being out of work for six months. Friends were telling me that I needed to hurry and get another job. In my mind, I was like, hurry up for what? I didn’t need to rush to another job, and the job I attained was the best of my career at that point.
But many people have to rush into finding whatever work they can because they can’t afford not to work.
If you were to lose your job, set yourself up to not feel financial panic by doing the following:
Habit: Always maintain multiple income streams. Never rely on one income source.
Build A two-year emergency fund so you always have time and cushion when you experience an income loss.
Habit: Practice living significantly below your means - always have disposable income and robust savings.
2. If you lost your partner, would you be able to support yourself?
You and your partner decide to separate. Though this isn’t always the happiest of moments, it depicts two individuals’ financial situations.
What are the financial implications of the separation?
Would you need to downgrade your lifestyle?
Are you able to support yourself?
Can you immediately find new housing arrangements, or are you financially dependent on each other?
You’re in a healthy financial spot if you can separate and immediately go about living your life and supporting yourself. If you and your partner were to separate and you cannot do this, start working on your finances now - not in anticipation of separation, but to ensure you always maintain financial independence.
3. If your car broke down, could you get a new one with cash while maintaining a positive net worth?
Whether your car breaks down, blows up, or gets stolen, insurance can help, but sometimes, it can’t.
If you were to lose your car and need to purchase a new one, would you be financially able to do so without compromising your health?
Here are a few things to have in place before buying a new car:
A positive net worth
On track with retirement, savings, and investments
The need for a new car; maybe you don’t truly need a car after all
The ability to purchase the car with cash - even if you use financing
Moreover, your car purchase shouldn’t exceed 10% of your annual net income. This might seem aggressive, but it will prevent you from overspending 99.9% of the time.
If you earn 20k a year, spend at most 2k on your vehicle. If you earn 200k a year, spend at most 20k on your vehicle.
4. Based on how much money you need in retirement, how on or off track are you?
If you desire to have two million dollars saved up by age 70, how much do you need to invest monthly to reach this goal?
If you’re already 50, you still have plenty of time to build your bag. The same logic applies to those even older. With the accelerated rate of technology, people are living longer. There is no reason to stop working when you’re in your 60s and 70s. Keep your mind active, and use this time to build up your savings. Compound interest will help accelerate your investment balance, and the more time you give it, the more it will work its magic.
Here is an example of someone starting with $1,000 who aims to save 2 million dollars. Over twenty years, at an estimated return of 10%, they will be able to reach their goal. If they want to reach their goal faster, they need to increase how much they’re saving.
If you’re not used to saving and investing thousands of dollars a month, it’s a good time to stretch your self-imposed limitations and think bigger.
Photo Credit: Nerd Wallet Investment CalculatorPhoto Credit: Nerd Wallet Investment Calculator5. If you have debt, when will it be paid off?
The primary debt I wanted to pay off was my car note, which I paid off in three years, and my parent plus student loan. Other than that, I try to avoid debt as much as possible unless I have passive income to cover the debt or it’s an investment opportunity.
A few types of debt to avoid:
Car loans
Student loans
Credit card debt
Personal loans due to not having an emergency fund
Some of these debts are okay if you can pay them back immediately, but most people who acquire these types of debt can’t afford to do so immediately.
An excellent example of this is a car note. Paying for a new car with cash might not make sense when you can invest that money to build wealth. Instead, take out a car note and pay off the car early while investing. Before purchasing a car, ensure you are financially able to pay off the vehicle anytime. Always be able to purchase the car you own in cash.
I recommend avoiding student loans as much as possible. There are grants, scholarships, programs, and good old-fashioned jobs to help pay your way through school.
Credit card debt and personal loans can be avoided with proper spending habits, living below your means, and maintaining a two-year emergency fund.
6. Do you have more than one income stream?
My parents taught me early on the value of having multiple income streams. Not only does this help you be more economically bulletproof, but it also helps you to be recession-proof.
Managing multiple income streams is just good business and practice. It creates options and flexibility and mitigates your financial stress.
7. Is your home a financial burden or a delight?
Many people bought the dream home only to their financial detriment. They’re cash-poor, in debt, behind on retirement, and would probably be better off without the house.
I don’t discourage or encourage people to buy homes. I only recommend that they do what’s best for their financial situation. Interest rates will always increase, so don’t let fear, FOMO, and a lack mentality force you into buying something you’re not ready to manage.
When you have the right financial setup, interest rates don’t mean much anymore.
If your home is a financial burden, consider whether it’s worth letting it go and downgrading to the rent lifestyle. Get back on the right financial track.
If your home is a delight and you’re on track with retirement, paying your home off early, meeting your other financial goals, and financially thriving, cheers to you-you’re doing it right!
For Renters
The same question applies if you don’t own a home: Are your housing arrangements a burden or a delight?
8. Are you financially struggling or financially thriving? What does each mean to you? Define it.
It’s always good to think about this question to yourself. How do you feel about your financial situation?? Are you happy and satisfied, or are you feeling the opposite? Do you feel there is considerable room for improvement? What changes would you like to make? Are you earning your ideal income? Do you feel financially strapped? Is money a cringe-worthy or sensitive topic for you?
Kudos to you if you’re financially thriving; you’re unusual.
If you’re not financially thriving, welcome to the experience of most people. We’ve all been there or are here now.
The question is, what are you willing to do about it if you’re not financially where you desire to be?
The most painful part of building wealth is the need for discipline. Once you’re ready to apply discipline, there are no limits to what you can create for your financial situation.
9. What is the last financial book you read?
You have to learn and apply your mind. You can’t stop educating yourself about personal finance, especially if you’re struggling in the area.
The amount of knowledge gaps we all have is incredible. It can be overwhelming, but if you want to grow, you must stretch yourself and do things you’ve never done before. Always know the last financial book you read and the next one you will read. Keep reading until you reach financial unconscious competence.
10. Setting Clear Goals: How on or off track are you?
What are your financial goals? Do you have any? Do you know them off the top of your head? If not, do that now. A person with a plan is heading somewhere definite. Always know where you’re headed. Once you have your goals, these will guide you in determining what steps you need to take.
Recap: The 10 Financial Checks
1. If you lost your job, would you panic?
2. If you lost your partner, would you be able to support yourself?
3. If your car broke down, could you get a new one with cash while maintaining a positive net worth?
4. Based on how much money you need in retirement, how on or off track are you?
5. If you have debt, when will it be paid off?
6. Do you have more than one income stream?
7. Is your home a financial burden or a delight?
8. Are you financially struggling or financially thriving? What does each mean to you? Define it.
9. What is the last financial book you read?
10. Setting Clear Goals: How on or off track are you?
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.