How healthy are your finances? A financial health quiz may be just what you need to identify some areas for improvement and get motivated again.
Financial health calculator
In fact, I came across a handy financial health calculator at Money.CNN.com that measures your health across key areas such as your housing payment and retirement savings.
Tools such as these are sometimes a good way to get and idea of where you need to apply more focus. They can be a good way to raise some red flags, but probably shouldn’t be the sole resource for analyzing your financial situation.
The results might tell you you’re not contributing enough to retirement. But keep in mind, that doesn’t mean you should immediately bump up or start your retirement contributions. Rather, you should identify what is standing in the way of investing more in retirement. Perhaps you need to work to accelerate your emergency savings first?
The calculator provides a measure and pretty good tips across important areas of your finances.
Housing payment
The tool explains housing payments should not exceed 28% of your gross income. There are obviously different schools of thought on the percentage of gross income your housing payment should be. Dave Ramsey suggests 25%. I tend to follow the more conservative advice, but situations may vary, especially if there is no other debt.
Debt
Total debt (including the home mortgage shouldn’t exceed 36% of your gross income. Again, I tend to lean towards a more conservative estimate so I like around 33% (an additional 5% on top of your mortgage payment), but the tool is still good in that it can surface problems in this area.
Emergency Savings
The tool recommends of keeping 3 months of savings in a high yield savings account. Depending on your situation, this might not be enough. Experts are now saying it’s a good idea to have in excess of 6 months if possible. Obviously, situations vary. If you’re job situation is more risky or volatile, you may need to lean towards the higher side here.
Diversification
The calculator wants to know what % of stocks you’re invested in. Based on your age it determines if you need to increase the stock allocation to insure the right amount of growth. The rule of thumb used is subtracting your age from 120 to get the right percentage.
Company Stock
There is good advice here in avoiding a high allocation in your company’s stock. The advice is to keep these investments below 10%.
Life Insurance
Hopefully, you have some life insurance. Especially if you have dependents. The rule of thumb used here is to replace your salary for at least 10 years, if you have dependents.
Retirement Savings
The calculator will tell you if it thinks you might not be contributing enough to retirement. However, your personal situation is based on a lot of factors such as when you’re planning to retire, what you expect your costs to be at retirement and how long you’ll live.
At the end of the financial health quiz the calculator will give you a grade and remind you of problem areas you may have encountered along the way.
Personally, I recommend talking to a financial advisor if you want to learn more about life insurance, diversification in your investment portfolio or to help you identify how much you need to contribute to retirement savings.
How are we doing?
One of our goals this year is to grow our emergency savings. It has been challenging to increase the size of it in the past few years with expenses health care bills for the youngsters and car repairs. We plan to get past the emergency savings point in our journey so that we can begin contributing more to retirement.
How did you do? What areas are you going to focus on improving this year?
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