Use these areas to see how your financial preparedness stacks up!

1.         Emergency Savings

3 or 6 months of expenses. How do you know if you should have 3 or 6 months? It depends on how many sources of income your household has. If you have 1 source of income, you should build a 6-month reserve. If you have 2 or more sources of income, then 3-months would be sufficient.

2.         Housing Ratio

Add your monthly principle, interest, taxes, and insurance together. Then divide that by your monthly gross income (before taxes and other deductions). The target is 28% or less.

3.         Total Debt Ratio

Add the previous monthly housing costs with all other debt payments. Divide by your monthly gross income. This should be 36% or less in order to maintain a health cash flow for discretionary spending, saving and investing for the future.

4.         Life Insurance

Life insurance can be used in several ways. The most common way is to “make up” for income someone would have made but they can’t since they have passed away. A good common rule of thumb is to have 10-16x the insureds annual gross income. Arguments can be made if this number should be on gross income, or on expenses they cover. A good discussion with an unbiased financial professional about your situation can bring clarity on how you should calculate it. Unbiased advice from someone who won’t make more income if you buy more insurance than you need.

5.         Saving Targets

If you are hitting the housing and debt ratios, you’ll probably have enough money to save 10-12% of your gross income. Depending on circumstances, here is a general hierarchy of saving/paying off debt: 1) Emergency savings 2) Get full 401k match 3) Pay off “bad” debt ie: anything not tax deductible 4) Max out HSA 5) Fund kids college accounts 6) Max out Roth or Traditional IRA 7) Finish maxing out 401k 9) Invest in after-tax brokerage accounts 10) Pay off mortgage.

There is wiggle room and priorities can change in this hierarchy, so talk with an unbiased financial planner to select the best order for you.

6.         Retirement Investing Targets

For your assets that are being saved for long term goals, like retirement, there are a couple meaningful numbers to hit. The first is the annual return. You should be able to make 8-10% annually over a long period of time. Of course, some years will be a lot worse than that, and some will be a lot better, but the average should hit around there. The second is the standard deviation, or how volatile the portfolio is expected to be in its moves up or down. You should target 8-14% standard deviation to get the best risk to reward ratio.

7.         Estate Planning

Make sure you have a Will, a Power of Attorney for Healthcare, Advanced Medical Directives and Beneficiaries on all accounts that can have them.

If you are hitting these 7 Financial Check Points, you are doing awesome!

Alan B Faerber CFP® CRPC®