You know the drill. Every time you go to your doctor’s office for a consultation, there are certain vital signs that are always measured: your weight, your blood pressure, and your temperature. Whenever I am at the doctor’s office waiting my turn to be checked, I follow the same routine. I de-layer as much as possible, breathe deeply, and imagine rocking gently in a hammock swaying in the coastal breeze. I hope that the readings will reflect all my efforts to be as healthy as possible.
I admit it. There are few things that I can do in that moment at the doctor’s office to really influence my vital signs. I take comfort as I await my results that the numbers aren’t static. When my appointment ends, in coordination with my doctor’s advice, there are activities that I can initiate to continuously monitor, improve, and sustain those numbers. When those numbers are in good shape, so is my overall physical, mental and emotional health.
The same is true for your personal finances. For all of us – no matter how wealthy we consider ourselves at this moment – there are certain vital signs that we all must monitor regularly if we aspire to enjoy long term financial health.
Savings
The first and most critical vital sign is savings: what percentage of your income are you saving each month? How much you need to save and the type of financial account you need to deposit your savings into varies according to your specific circumstance. Key factors to consider when calculating your minimal savings percentage include:
- How much do you earn and when do you earn it?
- What are your fixed costs? What expenses are discretionary and can be decreased or eliminated?
- How much have you saved already and in what types of accounts are these savings?
- When might you need to access your savings? How much money will you need at that time?
A general savings percentage that many financial professionals suggest clients use is 15% of your gross salary, or what you earn before paying taxes. To make this easier and more fun, my family set up automatic savings and makes it an ongoing game to set – and continuously try to beat – our family’s monthly savings.
Emergency Fund
The second most critical vital sign is how big is your emergency fund? Think of this as money that is easily available to you should you need to access it quickly, like if you experience a health set back or job loss. While some people claim that they can just use credit cards for this, I am not a fan of this approach. Depending on your overall financial situation and the interest rates on your credit card, you could end up paying a lot more for your emergency.
The emergency savings account can be in the form of cash or money market funds so that you earn interest. Retain approximately six months’ worth of fixed expenses in this account. When you need to tap into your emergency to pay for a true emergency, ensure you replenish the funds as quickly as possible after life stabilizes following the emergency.
Retirement Lifestyle
For those of you who dream of retiring some day, the third most critical vital sign is how much income and savings you can count on to pay for your retirement lifestyle? I say “count on” because many factors we can’t imagine happening in the future may impact the retirement nest egg we think we have today. Gone are the days when Social Security and pension payments provide enough income for most retirees. On average, Social Security covers about 25% of needs, so it’s essential to plan long before retirement begins how you will source the remainder of your income requirements. Many planners encourage their clients who aspire to retire to anticipate needing to replace about 74% of their pre-retirement income.
If as you digest these financial health vital signs you feel your own blood pressure rising, do what I do in the doctor’s office: take a deep breath. Remember that your financial vital signs – like your physical ones – are dynamic. You have the power to positively impact your financial future. Decisions you make today with your savings, spending, and investing are things that you can control.
You are not alone on your journey to optimal financial health. Just as there are many medical practitioners to assist you with your physical vital signs, there are many financial professionals to help you with your financial vital signs. A financial expert who always has your best interests in mind, like a Certified Financial PlannerTM, can help you understand your financial vital signs today and provide you customized advice, guidance, and ongoing support as you achieve your optimal financial health in the future.
Caroline Wetzel is one of Natural Nutmeg’s 10Best Winners for Business/Life Coach. Caroline is a Certified Financial PlannerTM (CFP®) and Vice President, Private Wealth Advisor with Procyon Private Wealth Partners, LLC. Procyon Private Wealth Partners, LLC and Procyon Institutional Partners, LLC (collectively “Procyon Partners”) are registered investment advisors with the U.S. Securities and Exchange Commission (“SEC”). This article is provided for informational purposes only and for the intended recipient[s] only. This article may also include opinions and forward-looking statements which may not come to pass. Information is at a point in time and subject to change. Procyon Partners does not provide tax or legal advice.