Last month I was required to complete a “Wellness Screening” as a part of my annual health insurance enrollment. The goal of the screening was to measure my cholesterol levels, blood pressure, blood sugar, and body mass index. Each of these numbers can be an indicator of my risk for serious illness now or down the road. The screening took some effort on my part: I had to find a clinic that works with my insurance, find the time in my schedule to make the appointment, fast before the appointment, and have my blood drawn, which can be less than comfortable.
I did all of this for two reasons. First, there is a financial incentive to complete the screening as we receive a $1200 credit towards our annual insurance premiums. Second, even though it takes time and the results are sometimes not what I had hoped, it is good to measure these numbers each year. The habit of measuring each year will not only let me know if there could be a problem, but also to keep me accountable in the future when making choices that could positively or negatively affect these numbers. Most people who are not required to record these numbers each year would have no idea what their cholesterol or blood sugar is. They may not even know their weight and how much it may have changed over the past year.
Just as knowing your bio numbers is important to your physical health, knowing your financial numbers is very important to your long-term financial health. If you go through life not knowing and not measuring these numbers, you are likely setting yourself up for problems in the future. Doctors tell you what numbers to look at for your health… but what numbers should you be looking at in terms of financial health? Here is a short list to get you started:
How much do you spend each year?
Probably the most important (and most uncomfortable) number to know is how much you spend and on what. Start from the top: How much did you make during the year net of taxes? Subtract anything you saved. This is your total spending. That number may feel alarmingly high (kind of like when you actually make yourself count calories), but it is likely quite accurate. Once you have that number, you can go through the categories to try and find areas that either won’t be there in the future, or that you can trim back. Note: Most people have no idea how much they spend. Do you?
What is your net-worth?
Create a simple net worth statement and detail all of your assets and all of your liabilities. Subtract your liabilities from your assets to get your net worth. Record this number each year and note if your net worth is growing or shrinking. Did values simply go down, or are you taking on more debt? Obviously the goal is to have your liabilities decrease and your assets increase each year.
What percentage of your income are you saving?
If you are still working, saving is a powerful tool that not only forces you to spend less now, but also puts money aside for future expenses. You should save for short-, mid-, and long-term goals. Add up how much you are saving for long-term goals (mostly retirement) and divide that by your total income. That is your savings rate. Depending on where you are in your financial life-cycle, a good savings rate is between 10-20%.
What is your withdrawal rate?
If you are retired or nearing retirement it is important to know your annual withdrawal rate. Your withdrawal rate is the percentage of long term assets you need to withdraw each year to maintain your standard of living. A general rule of financial planning is that you want to limit your withdrawal rate to around 4% annually.
Just like my required annual wellness check, it does take some effort to produce and compare your financial numbers each year. After they are calculated you may need help interpreting the numbers and taking action moving forward. As financial advisors, we measure, monitor, and keep our clients accountable for their financial health numbers. Know your numbers.