If you’re like many Americans right now, you’re worried about your finances. Even if nothing has particularly changed for you in the past year – perhaps you still have the same job, same mortgage payment, same retirement accounts – you likely now have a gnawing sense of insecurity about what the future holds. And if something has changed for you – like loss of a job, a pay-cut, increased credit card interest rates, or a looming foreclosure – your worry level may be magnified by a factor 10 or more. Even though we’ve had a nice run in the stock market over the past 5 months and there is some encouraging economic data in the news, that sense of confidence that many felt just a year ago is nowhere to be found.
So, is your worry justified? I’m going to give you 5 quick questions to answer. It’s the 30-second financial gut check. If the gut check reveals that you have reason to worry, you can take the anxiety and use it to motivate yourself to take action. On the other hand, if it shows that you’re really doing ok, then you can use this gut check to start getting your confidence back.
- Are you spending less than you earn?
- Do you have an emergency fund equal to at least 3 months’ fixed expenses (6 months if you’re a highly compensated employee or in a volatile industry)?
- Do you regularly save for retirement or any other goals at the levels needed to fund them?
- Do you have zero debt or is your debt level going down?
- Have you taken steps to manage financial risks – either by avoiding the risk, saving the funds to cover the cost of potential losses, or purchasing insurance?
If you can answer yes to all of these 5 questions, you have great reason to start feeling more confident. You are taking the basic steps necessary to create a solid financial future. Great job! Now it’s time to focus on the next steps which are making sure your investments are working hard for you, that you’re not paying too much for products and services, that you’re optimizing tax-efficiency, and that your estate plan is in order.
If you can answer yes to 3 or 4 of them, you still have good reason to feel confident. Depending on the severity of the 1 or 2 issues that you said no to, you may be really close to mastering the financial basics. The key for you is to address the 1 or 2 issues as soon as possible.
If you answered no to 3 or more of the questions, it may be time to let your sense of anxiety be a motivator for you. There are some life transitions – for example, when you’re starting a new business, in career transition, or adjusting to the loss of a family member – that you may answer no to every single question. If the situation is temporary, especially if you’ve prepared the financial reserves to weather it, there’s no cause for concern. It’s when these situations extend themselves over years and become accepted as the status quo that alarm bells need to go off.
If you answered no to 3 or more questions and your situation is not temporary or prepared for, you have multiple warning signals that your financial situation is precarious. It’s time to take immediate steps to increase your income levels and/or reduce your expenses. You need to develop a plan to bring your financial life into balance. Many financially successful people have been in this situation and through creativity and hard work gotten themselves on the right track. It is attainable by coming up with a plan, making tough choices, and then working your plan. Good luck!