This is a quick and easy way to assess your financial health, summarized and contained on one page.

Cash on hand. Some call this an “emergency fund” which I believe is badly named and not a helpful characterization. Here’s what you really need to know: Do you have enough cash on hand to cover your biggest exposure? If you don’t know what your biggest exposure is, take a few minutes and think about it.

If it’s an unexpected car repair, that’s one thing. If you work in an industry where there are frequent layoffs, and it’s possible (or even likely) you may one day find yourself jobless for 6 months, that’s a very different thing.

Be both practical and realistic when assessing your exposures.

Savings. Ignore everything you have ever read about this. If you’re saving anything on a regular basis, you’re off to a good start. Remember to take credit for everything here, including things like employer matches.

Think of savings as a way of life, not some edict handed down by personal finance “experts”.

Housing/lodging costs. Include in this all related expenses. For example, if you own a house, include principal payments, interest payments, property taxes, and homeowner’s insurance. Note annual maintenance costs get piled on top of all of that.

If these costs total 28% or less of your gross income you’re doing fine, meaning you are likely to have money “left over” to cover other expenses. The higher this percentage rises, the more likely you will fall into the “house poor” category. Recent increases in housing prices have made this more and more difficult.

Debt payments and income. Add up all your recurring monthly payments: housing/renting, student loans, car loans, and credit card payments, and divide the total by your monthly after-tax income. This is your total debt to income ratio.

If it’s 36% or below, you’re doing fine. If it’s higher, you’re at risk for sinking deeper and deeper into debt as a way of life, and increasing the probability lenders will either refuse to lend you money in the future, or they may do so but only at significantly higher interest rates. Keep in mind that future borrowing at higher rates of interest contribute to the possibility of continuing to sink deeper into debt.

Net worth. Add up the market value of everything you own (your assets) and subtract all your outstanding debts (accountants call these liabilities). If you own an auto that has a market value of $10,000 but also has a loan balance of $8,000, the car counts as a $2,000 asset. And don’t forget to include household furnishings, savings accounts, 401K accounts, and investments if you have any.

You want your net worth to grow over your lifetime, starting small when you are in your twenties and growing to an amount that will enable you to retire at your choice of retirement age later.

A lifetime financial roadmap, a tool to replace uncertainty with understandable and manageable levels of risk:

• Your financial life and projected financial future in a detailed spreadsheet that is not difficult to understand where changes are quickly and easily made as your circumstances change.
• An excellent tool to help you determine if or when you can retire and what your financial life might look like in retirement. I used it to determine whether my wife and I could retire early at ages 57 and 55. We retired – the tool worked perfectly.
  

Elements of the roadmap:

• Spending: base, housing, medical, taxes
• Income: pensions, Social Security, annuities, IRA withdrawals, rental income
• Investments: tax-deferred, tax-exempt, taxable
• Real estate: home, rental properties
• Discretionary: income minus spending
• Net worth: liquid and illiquid assets
• Projections, by year, to age 100 (or later, if needed!)

The output: year by year tracking of your entire financial life using easily changeable assumptions. 

If you are interested in pursuing this, click on the Contact link at the top of the page and request the Excel spreadsheet template you can use to enter your own personal data and make your own financial projections. It’s free.

 

Imagine you are 65 years old, have an average life expectancy (86.6 years for men and 88.8 years for women), ignore the tax implications, and now choose which would you rather have:

1) $1,000,000 deposited in your bank today, or

2) $5,000 deposited every month in your bank for the rest of your life, guaranteed.

Your choice reveals a great deal about your attitudes towards money in general, and your ability and willingness to take risks. This has critical and relevant implications for saving, spending, and investing.

Take a minute or two and consider whether you fit into any of these categories and, if so, what the implications might be.

• Allowing money to be your master rather than your servant.
• Being unaware of how your views on money may be negatively impacting your goals.
• Resisting defining financial objectives.
• Being unaware of objective and subjective differences between men and women regarding longevity and risk avoidance.
• Being willing to turn over asset management to brokers or other financial industry people who have little or no understanding of your total financial circumstances.
• Not understanding what a fiduciary is, what that means, and why it is important.
• Reading and being influenced by financial articles when you lack the tools to assess their validity.
  
• Turning over all the major financial decisions to a spouse with little knowledge or input from you.
  

Every client has an IPS – Investment Policy Statement – that is reviewed annually. It contains overall objectives, approximate net worth, emergency fund requirements, assets under management, anticipated time horizon, an overall portfolio objective, risk tolerance, investment vehicles to be considered, tactical asset management, cost control considerations, benchmarks for portfolio evaluation, tax considerations and other pertinent information, and monitoring and reporting frequency.

If you have money invested with a broker or investmenr advisor and do not have an IPS, find yourself another advisor. I cannot make this point strongly enough.

Investment Policy Statements are sent out every year for review. Things change, and changes are reflected in updates.

Every investment purchase is made within the context of the client’s objectives as stated in the IPS. There are no exceptions to this unless discussed beforehand with the client.

The US stock market is the sole investment vehicle. Some individual stocks trading with P/E ratios less than their 5 year average are held, stock and bond ETFs, BDCs, and cash in money market accounts are held. The amount of cash held in accounts will range from 5% to 50%, depending on a client’s risk tolerance and market conditions. Holding cash is a critical part of maintaining a margin of safety.

In trading, I embrace a ruthless approach to eliminating sunk costs. Many investors are reluctant to sell a stock at a loss, possibly because they are unwilling to admit that they may have, in their opinion at least, made a mistake when they bought it. I take the opposite approach – if I later believe I have made a mistake by buying a stock at the price I paid, I will sell it and never look back. I don’t strive to be a great investor; my goal is to make more good decisions over time than poor decisions.

I strive to avoid what I call “the tyranny of numbers”. Numbers in math and science have specific meaning; numbers in a financial spreadsheet sometimes take on a life of their own when they are better viewed as guideposts. A number accurate to two decimal places can be a misleading number that has the superficial appearance of credibility.

I consider identifying and acknowledging “I don’t know what I don’t know” a strength, not a weakness.

When judging my performance as an investment manager, I track not only the things I did, but also the things I didn’t do. This is necessary to maintain a balanced perspective as we all tend to forget that sometimes actions we did not take have greater impact – positive or negative – than actions we did take.

I ignore 99% of the nonsense published in the financial media and focus instead on the handful of people whose opinions have merit. It can take years to identify this small group of people.

When contemplating a career change, why not start with an assessment of your financial circumstances to determine what might be possible?

Let’s start with a financial plan containing:

An emergency fund to cover unexpected expenses without having to borrow money or charge them on a credit card.

A detailed understanding of your basic living expenses – a budget.

A timeline of how you expect to get from where you are to where you want to go.

Next define some goals

Define salary goals independent of any thinking you may have already done about careers:

What is your minimum acceptable salary amount? Note that if you have a spouse already meeting basic expenses, volunteering may be a viable option for you not to be quickly dismissed. I know people who started as volunteers who turned into paid employees.

What is your desired level of income, your “feel good about yourself” income, the amount that would give you a satisfying feeling that you are making appropriate use of your talents and skills?

What ideal amount of income would result in your thinking about what to do with the “excess” dollars?

Now ask yourself whether you can live with an important commitment: retirement savings (401(k) plans, traditional IRAs, Roth IRAs) are off limits for early withdrawals and borrowing. Vow never to use your retirement savings for anything other than retirement.

Now broaden your perspective with a few important questions:

How willing are you to trade time for money? Which is more important to you?

What financial impact, if any, would there be on your family?

How would additional education or training be financed?

Do you understand the tax implications on your minimum, desired, and ideal salary levels?

Are you allowing for additional future changes in direction and circumstances – do you have a Plan B?

Stay focused on the basics

I know this is all basic stuff. But it’s surprisingly easy to lose sight of basics. It’s easy to become unduly influenced by dollar signs and to make decisions solely on that basis. It’s also easy to succumb to the “this is what I ought to do” mode of thinking. What do you really want to do?

I’m on my third career, and I can state unequivocally that jobs where you can clearly see that you are making positive contributions to the lives of others are ultimately the most rewarding ones.

So, start with a written financial picture of what is possible, learn from your past but don’t be unduly influenced or limited by it, and be willing to make future changes as needed.

Good luck and best wishes!