Your Finances: How to know how you’re doing (really)
If you’ve ever wondered how you were doing financially, you’re not alone. In fact, that’s often one of the questions my clients want answered when we first start working together. It’s natural to want reassurance that you’re doing what you should be to set yourself up for financial success.
“How am I doing?” financially speaking is a loaded question that often has a clear answer. However, the better question might be, “Are you ready to find out?” because knowing the reality of your financial situation can be a relief to some and an ominous foretelling to others.
Before you can find out how you are doing financially, you should be willing to do what it takes to be where you’d like to be financially. So let’s unpack this common question and see where you stand.
The Simple Answer to a Loaded Question
Financial planners generally start with running some basic calculations based on your current and future income, debt, investments, and net worth. With these figures, most any financial professional can provide a general idea of how your finances are performing today and how they may perform with a standard rate of inflation and conservative portfolio growth. It is by no means an exact science, but it’s a starting place with objective figures.
Unfortunately, too many people may stop at this assessment alone, and it is woefully insufficient to truly determine someone’s current and future financial health. These simple calculations really answer the question of how your money is doing – – not you. Net worth and future projections will always fail when it comes to answering the part of the ‘How am I doing?’ because it hasn’t taken into account your personal financial goals and needs throughout the course of your lifetime.
Measuring Financial Success: Appearance Vs Reality
Money is a taboo subject in our society. It’s just not something people are entirely comfortable talking about. As a result, you may be operating under false assumptions over what financial success looks like or how to make wise financial decisions.
It’s beneficial to understand that what we observe on TV, online, in the movies, or even from our neighbors is not necessarily financial success.
When it comes to financial well-being, there is often a conflict that exists between the appearance of financial success and reality. Just because your neighbor buys a brand new luxury car every two years does not mean that they can actually afford it. Often times, the most financially successful among us are the people who you would never think of because you can’t “see it.”
Perception Does Not Make it So
Overspending your income to “keep up with the Joneses” is pervasive in our culture. When the truth is that you may buy an expensive this or that to impress the infamous “others” who really do not notice (or care) about your stuff.
This desire to look well-off can lead to many unfortunate outcomes, most of which lead to debt – the very opposite of financial success.
Where to Focus Instead
When it comes to your personal finances, better to keep your blinders on and stay focused on your financial goals. What is it that you want your money to help you accomplish? And what choices do you need to make today in order to reach your long-term and short-term goals? Are you living the life that you truly want?
To do well with your finances isn’t a passive exercise. It hinges on regular money habits and requires that you make small, consistent, and incremental money decisions every day that will help you get (and stay) on track throughout your lifetime. The true marks of a financially successful person has very little to do with possessions. Four common signs of financial well-being include the following. How many of these can you check off your list?
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You live below your means (this doesn’t mean living like a pauper, it means not spending every penny you make)
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You are consistently saving 10-20% of your income toward retirement
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You have an emergency fund with at least 3 months of your fixed expenses
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You have the necessary insurances to meet your needs (homeowners, car, health, life, long-term care)
So, how are you doing financially? If you’re really not sure, chances are you have some work to do! The best time to get a handle of your finances was yesterday. But the next best time to take control of your finances is today. Don’t wait and hope you’re doing enough to ensure your financial independence when you can actively control your financial future right now.
