Recently I have begun to write articles on financial help, not just to help you or others, but to also help my own financial health and status.Â My ultimate goal is not to become rich, but to learn how to manage my money a whole lot better and hopefully you and others can learn along the way and do the same.
I am embarrassed to even mention this, but I actually have a degree in finance.Â You might be thinking, â€œHow is this guy even struggling to keep his financial matters in place?â€Â Well, to tell you the truth when I was in college a lot of the stuff taught pertained to businesses and how to handle their financial affairs.Â Yes, a lot of stuff can be applied to your own personal finances, but I let things slip and get out of hand.
I have managed to royally screw up my credit because I lost my home, not because I could not afford it, but because I refused to keep paying the amount of interest I was paying.Â You might say why did you even get the house? Well, you can say I was young, ignorant, and was basically putting too much on my plate, more that I could handle.
Though I am truly embarrassed, I will not make the same mistakes again. You live and you learn!Â
Everything I learn and find truly helpful will be posted here.
Enough about me and back to the real reason you are here.Â You want a financial health check because you want to check if you are managing your money properly.Â I too searched throughout Google for any information I could digest to help me in my situation and here is something interesting I found over at Money Magazine (I will use MM to represent Money Magazine throughout the article).
In order to find out how healthy your financial status is at the moment you must consider the following 6 things:
Here is something I should have considered when I bought my first house back in 2006.Â According to Money Magazine your total housing payments should not exceed 28% of your gross income.
So, if your total gross income = $3,000, you must multiply 3,000 x .28.Â In this case a house payment that you can afford would be $840.
I wish I would have known that when I first started house hunting back in 2006.Â If you are in the process of looking for a home right now I hope you consider this.
I had never considered anything like this before, but now I can see how having such a savings can benefit you once put in place.Â This is not to be confused with a regular savings, because an emergency savings is just that, in case of an EMERGENCY.Â Say you need tires for your vehicle or you get fired, this emergency fund is where you would pull money from, instead of pulling from your monthly budget, which can put you in a tight circumstance.
According to MM, you should keep 3 months worth of living expenses in a bank savings account or a high yield money market fund for emergencies.Â If you have kids or rely on one income, make it six months.Â
When I first read that, I thought it was crazy, how can someone save that much, but it is something I plan to put in place with my next check.Â I went over to my bank and talked to one of the bankers there about starting an emergency savings.Â I learned that I can set up multiple savings accounts in order to meet my financial needs and goals. I am not going to put 3 months of living expenses right away, but I set it up to where I will start saving a small amount each month until I meet my goal.Â I will first try to hit one month worth of living expenses and go up from there until I hit 3 months.
Once this is put in place it can help you with any financial strain that an emergency can cause, because now you will have somewhere to turn to for help.
When I first read the criteria for the percentage of debt you should have, I truly learned the reason I was struggling to make it month to month.Â You ready to hear this?
MM states that there is nothing wrong with using loans to buy a home, finance a car, or get an education, but stay out of trouble.Â Your total debt payments should not exceed 36% of your gross income.
If you are like me, you need to start adjusting your financial state right away.Â I am really happy that I started looking for a financial health check.Â Now I know that my financial health is not good at all at the moment.
This deals more with investing, but I really think there is room for financial growth.
MM says the stocks can provide good growth, but pose a lot of risk in the short term.Â Bonds offer more stability.Â If you are saving for retirement and want a quick idea of what percentage of your portfolio should be in stocks, subtract your age from 110.
Presently I do not invest in anything, but I plan to start in the near future.
The following criteria I do invest in because in the event that something happens to me I want my family taken care of.Â I donâ€™t mean set for life, but they will have some type of cushion to lean on.
MM says that you need enough life insurance to replace at least five years of your salary, as much as 10 years if you have several young children or significant debts, but you might not need it at all if you have no dependents.
You might think 5 or 10 years is a lot, but when it comes to my family I think it is well worth it.
As a teacher I am lucky that they pull TRS (Teacher Retirement System) from me.Â They will average my 5 highest paid years, as far as salary, and I will get a certain percentage of the final average.Â It will probably be enough to get by, but I wonâ€™t be rich.
This is the reason I also plan to start setting aside a certain percentage of my gross income to supplement the amount of money I no longer receive after retirement.Â Iâ€™ll get my TRS plus whatever I have saved.
MM states that the amount you pump into your retirement savings depends on a lot of things, like how much of your â€œpre-retirement incomeâ€ you expect to draw each year after you quit working, how much your nest egg will continue to grow, and how long youâ€™ll live.Â They state that 65 should be your retirement goal.Â Take advantage of tax-deferred retirement accounts and if you got access to a 401(K) plan at work, contribute the max amount allowed.
After reading this I hope you now know where your financial health stands.
I know there are other rules that can go along with these, but I found these to be the most important at the moment.Â I myself plan to start pumping money into my emergency savings account and lower my total debt payments to at least 36%.Â Hopefully in the future with proper planning I can work my credit back up and purchase another home.Â This time I will be sure that it does not surpass 28% of my total gross income.
I may have made some mistakes, but I have learned from them, believe me!Â I hope my quest for passing my next financial health check is now somewhat on the right track.Â I hope I have helped you and others get a better understanding of where your financial health stands.Â I really hope you internalize the info I found for you all, because I know that it is going to help me.Â I will try to keep you all updated on anything else that might help your financial state.
So, how is your financial state at the moment? Do you meet any of the criteria mentioned?Â