A financial checkup checklist might include automating contributions, staying disciplined, and sticking to goals
As markets move, and as time passes, it’s important to review your portfolio and consider rebalancing allocations
In times of uncertainty, an emergency fund might become a necessity
Have you had your annual wellness screening? You know, the one where you (along with a professional) take a look inside, check the vitals for any imbalances, and compare the results to last year’s numbers and those typical for your age group? Sounds like a medical checkup … or a financial one.
During times of stress and uncertainty—such as the COVID-19 pandemic and economic meltdown in early 2020—the health-and-finances analogy can be taken a step further. Just as health vulnerabilities and high risk factors can exacerbate the effects of the coronavirus, going into this economic period with lowered financial stability can really put a dent in your goals.
Here are a few things to consider as you assess your financial health.
Five Essential Vitamins for Financial Health?
Dara Luber, senior manager, retirement at TD Ameritrade, offered these five elements as a sort of “checkup checklist.” Think of them as the financial equivalent of the recommended allowance of vitamins and minerals.
- Revisit your goals and ensure you have a financial plan in place. “Review your portfolio at least once a year to ensure your allocations still align with your needs. There are tools such as the TD Ameritrade Retirement Calculator that can help you on your journey,” Luber suggested.Rebalance your stock and bond allocations. You may need to rebalance if stock and bond allocations have shifted because of market movements, whether up or down. Depending on how the different asset classes performed, your portfolio mix may have shifted. “A periodic review can help you keep your portfolio in line with your goals and risk tolerance,” Luber pointed out. Review your investment risk level and explore income options. “Pre-retirees or retirees who are more nervous about down markets may not want to take as much risk with their investments,” Luber said. “If so, it might be time to explore moving some of the allocation from equities to income-oriented investments.”Stay the course and use discipline. During times of uncertainty, it might be important to manage expenses. How are your budgeting skills these days? Austerity isn’t always fun, but the goal of financial stability can be a worthy one. Set up an automatic savings plan for regular contributions. “Try to contribute regularly to a retirement account—even if it’s just a few dollars every month. And it’s never too late to start. Having the money automatically deducted from your account each month takes away the guesswork of trying to time the market and stay focused on the long-term goal of arriving in retirement prepared,” said Luber.
Now that the checklist is set, it’s time for the checkup. If you’re like many people, the diagnosis and suggested remedy for financial health may be the same as it is for physical health: Develop good habits, including an exercise regime and a healthy diet.
Habits to Curb
Is the amount of money you save each month determined by how much money you have left after you’ve paid the bills? What about any discretionary spending—is takeout from your favorite restaurant more important than saving a few bucks for the future? That can be a tough habit to break.
What if you were to turn that thinking on its head and pay yourself first? Of course, you’ll need to settle the basic living expenses—housing, transportation, food, and such—but you should be making regular contributions to your savings and retirement accounts, and many financial professionals say this spending should jump the queue. Worried you won’t be able to stick to it? Most banks and brokerages will let you set up automated deposits.
Plan for tomorrow by setting financial goals today.
If you’re like most people, you’re juggling several priorities at once, each of which seems to take precedence in the short term. “I’ll pay extra into my savings next month,” you say. But do you follow through? If you think of saving for your future as a mandatory item that takes priority over certain discretionary items, you may be surprised by how much you can save.
Develop Your Exercise Routine
According to Luber, in fitness as well as finances, the key is to make small, measurable goals and stick to them. “Instead of saying, I’m going to go to the gym every day and run a marathon this year, I would make it a goal to go to the gym three times a week and eat a salad for lunch Monday through Friday,” she suggested. “The same could be true for your finances. Don’t set lofty goals that are unrealistic. Instead, start out by saving $25 or $50 a month.”
There’s nothing wrong with treating yourself occasionally. In fact, such rewards can help keep you on course. The trick is to keep reaching for your goals until it becomes part of your routine. Like the fitness enthusiast who feels a bit of a buzz from a good workout, you can eventually feel that same sense of accomplishment as your account balance grows.
Again, it comes down to priorities. If you build time into your life to work on your financial priorities, much as you build time into your schedule to fit in a workout, you may gain better control of your financial fitness.
Go on a (Spending) Diet
But what if you feel you’re barely making it with your current household cash flow? Perhaps you’ve been treading water for a few months, and then a child’s tuition bill comes due, or it’s tax season? Well, first of all, those expenses aren’t unexpected, so they should be in your budget. And for unexpected events, such as a temporary unpaid leave of absence from your job or a furnace that conks out just after the warranty expires, you should consider having an emergency fund—three to six months of living expenses in a liquid account.
In general, people can find places to trim the fat in the household budget. And the sooner you begin, the better. Money tends to grow over time, from interest, dividends, and—depending on the contents of your portfolio—growth. So where do you start? Luber recommended writing down the top 10 things you spend on every month. “Prioritize those by how happy they make you, and cut the ones that make you the least happy,” she said. “Put that into savings.”
Bottom Line on Financial Health & Well-Being
Just as there are clear short-term and long-term physical benefits associated with a sensible diet, regular exercise, and avoiding bad habits, applying this same logic to your finances can help you be financially fit.
We all have the occasional setback—whether it’s professional, financial, or health-related. But if you’ve entered the challenging period with a clean bill of health and work toward financial stability, you might be able to navigate the period without too much damage to your long-term outlook.