1. What are your financial and life goals?
It sounds simple enough. But without a “why” – i.e. identifying your family’s long-term objectives — it’s hard to muster the discipline necessary to put off a new SUV purchase or a vacation in the Bahamas in order to boost your savings.
“When you have defined goals in place, this can provide the needed motivation to examine spending habits and potentially make beneficial changes,” says John Bush, an advisor with Elevate Financial Planning in Grand Rapids, Michigan.
“Budgeting should really start with couples sitting down and talking about long-term goals that have a financial impact,” adds Steve Martin of Oasis Wealth Planning Advisors in Nashville. That includes everything from your retirement to college tuition to buying your teenager a used car. By identifying what really matters to you, you come away with a better sense of not only what you can spend, but also what you should be spending your money on.
2. Do you have any debt? If so, what kind?
If you’re in the red, one of the best ways to get yourself on track financially is to get serious about paying down high-interest loans. But that requires a bit of strategy.
“If you have debt, knowing the interest rate is a must in order to prioritize payoff and to minimize interest,” says Bush.
Often, parents don’t recognize the difference between “good” debt like a mortgage or student loan, and the balances they rack up for fleeting pleasures like a trip to Disneyland, says Rorik Larson, an advisor with Essential Financial Strategies in Palos Heights, Illinois.
“There’s debt that’s necessary to grow your future income versus debt that detracts from your future,” Larson says. Eliminating the latter should be high on your to-do list.
3. Are you generating a budget surplus or deficit?
Some folks track how much they’re bringing in each month and how much is going out with the precision of a NASA engineer. But for couples who use credit cards on a regular basis or dip into savings, knowing whether you’re running a surplus or not gets a little muddier.
If it’s been a while since you’ve poured over your bank and card statements to figure it out, it’s probably something you want to look at, says Bush. Unless you learn to live within your means, you won’t be able to adequately fund your savings.
4. What’s your net worth?
You can use our Free Excel Worksheet to Find Out Your Net Worth
If your monthly cash surplus (or deficit) serves as a barometer of what direction you’re heading in the short-term, your net worth provides a broader snapshot of your financial health. Bush recommends periodically keeping tabs on your 401(k) balance, home equity, and other assets and subtracting any student loans, credit card balances, and other such debt.
“Knowing and monitoring your net worth can serve as a long-term motivator to continuing to make good financial choices,” says Bush. When you graduate college, it can take several years just to get in positive territory. But if you have kids and are more established in your career, growing your overall wealth becomes an absolute must.
5. Are you on track for retirement?
Saving for retirement isn’t like taking a test in your favorite subject, where you can cram in some studying at the 11th hour and still expect to pass. For most people, it takes steady contributions over decades to amass a hefty enough portfolio that you can live off for the rest of your life.
Martin contends that you really need a tailored approach to finding your target savings rate rather than relying on broad rules of thumb. Of course, a financial professional will be able to crunch the numbers for you based on your retirement age and lifestyle. But there are also any number of online calculators that can help you figure out what you need to be socking away. The more detailed those calculators are, the more useful the results, states Martin, a member of the Alliance of Comprehensive Planners (ACP), an organization of fee-based advisors.
“By seeing the numbers, it encourages the individual to take more ownership,” says Martin. “They have a better understanding of how their actions will impact their future.”
6. Am I striking a good balance between long-term and short-term needs?
If you’re not diligently putting money away for long-term needs now, you could be looking at a lot of extra time in the workforce to play catch up. But while squirreling away money for your tomorrow is critical, you don’t want to ignore the here and now, either.
For Martin, it’s all about finding the right middle ground. “If you’re sacrificing different experiences or educational opportunities for your kids just by focusing on your retirement, you may not have the right balance,” he says.
7. Is your home the right size, financially?
It’s a fool’s errand trying to meet your savings goals each month while ignoring the number one expense for most parents: housing. If your mortgage payment is crowding out the rest of your budget, there probably isn’t going to be anything left over for your future self.
“Generally, one’s house value should be two to two-and-a-half times the family’s income,” says Larson, a fee-based advisor and ACP member. There are exceptions here. If you live on the coast, he says, three-times your income or a little more is probably necessary. And the Covid-fueled spike in prices is going to throw the numbers off for at least a while. But as a rule, hewing close to that line will help keep you out of trouble.
8. What’s your portfolio allocation?
You really want to take a look at your mix of stocks and bonds to ensure it’s a good fit for your cash flow needs and risk capacity, says Martin. Older adults should generally steer their portfolio in a more conservative direction to better weather any financial storms. But for young parents who expect to be working for another few decades, Martin suggests that growth should really be your main objective. “Over the long-term, stocks are usually the place to be,” he says.
That doesn’t mean taking unnecessary risks, though. Martin recommends diversifying across different asset classes, and between domestic and foreign holdings, to stabilize your portfolio and take advantage of growing markets.
9. What is your marginal and effective tax rate?
Be honest. Do you have any idea whether you’re in, say, the 12-percent or the 22-percent tax bracket? Knowing how much the IRS is going to snag from each additional dollar you earn can help you figure out, for example, whether pursuing a side job is worth your time after factoring in taxes.
Knowing your effective tax rate – the percentage of your overall income that goes to Uncle Sam – can also help you make smarter decisions about how to save. “For example, some low-to-middle income earners may benefit from contributing to a Roth 401(k) rather than a traditional 401(k), if available,” says Bush.
10. Are you investing in your career?
Yes, keeping your discretionary spending in check is crucial to your financial well-being. But so too is maximizing your earning potential so you can afford the lifestyle you’d like to maintain for yourself and your loved ones.
For some folks, that could mean going back to school to earn a degree that will boost their long-term prospects. But in many cases, even pursuing a specific certification can lead to slightly better pay, which gets multiplied throughout your working years. “The more we invest in ourselves and our capacity to earn, the greater the outcome will be in retirement,” says Larson.
11. If something were to happen to you, would your family be able to weather the storm financially?
One of the most important financial steps you can take as a parent is making sure your family is prepared should something tragic happen or you lose your ability to work. Martin advises parents to build an emergency fund that can handle six months or more of expenses. And you really need adequate life insurance and disability coverage, assuming they don’t get the latter through your employer, to keep them afloat long-term.
12. Would your loved ones know what to do if you suddenly passed?
Having some cash and an insurance policy for your family is one thing, but making sure they can access them in the wake of an unforeseen tragedy is also imperative, says Larson. If your spouse doesn’t know where your checkbook, estate planning documents and advanced directives are, they should.