5 Questions You Need To Answer About Your Finances

How to take an honest look at your financial position.

THE IMPORTANCE OF FINANCIAL REFLECTION

It is outstandingly difficult to look at yourself in the mirror sometimes. When is it most difficult? When you don’t like what you see, figuratively or literally. This rings true in our financial lives as well. Sometimes we don’t like what we see with our financial position, but if we fail to address our financial problems head-on, like anything else, they will fester. We have to take time, regularly, to ask ourselves if we are on the right track. Doing this will make it clear what our goals and objectives should be with our money. It will also motivate us to act on financial problems that have been around for some time and need addressing before they get out of hand.

This being said, I want to provide you all with some questions that you can use to reflect on your own financial position and recognize where you need to go from here. You can/should work through these questions in order, and feel free to dig into the minutiae of each one. These are simple questions that will unveil much bigger issues in your financial life. The good news is, only you have the power to change what you don’t like in the mirror, so start reflecting and change where necessary.

QUESTION 1: ARE YOU IN DEBT?

61% of Americans live paycheck-to-paycheck. Have you ever wondered, why? Far and away, the biggest reason for this is DEBT. The average American has nearly $100,000 in non-mortgage debt. This is, undoubtedly, making the average budget EXTREMELY tight! If you are making $60k/year, $100k in debt creates a huge burden on your income to where you have little room to do anything else. My suggestion would be to clear any and all non-mortgage debt BEFORE building any substantial savings or investments. This is not easy, but it will pay off most by creating more disposable income for you and/or your family. I would suggest doing this through the debt snowball method and with much focused intensity. If you are happy giving banks all your money in interest, be my guest. But if you want to be financially successful and wealthy in the long-term, you NEED to become debt-free.

QUESTION 2: DO YOU HAVE EMERGENCY SAVINGS?

Have you ever just paid off your credit card then your car doesn’t start? Or you have to go to the E.R.? Believe me when I say that anything that can go wrong, when you have no savings, will. Not only do we need to have no debt so that we have margin in our budget, we also need emergency savings so that when unforeseen things occur we can just pay for them and not find ourselves back in debt because of them. A good emergency fund should be about 4 to 6 months of household expenses to adequately cover most potential emergencies. We are not trying to cover all things that could happen, but we want to insure against the most common things. Emergency savings is insurance against tragedy. That is exactly what you need.

QUESTION 3: ARE YOU INVESTING A LARGE PORTION OF YOUR INCOME?

Social security won’t be enough. You won’t likely be able to work until you die. You NEED to be investing a large portion of your income for you and your family’s future. Many would suggest investing 15% of your income, as that will likely be enough to fund your retirement and anything else you may need/want in the long-term. For example, if you make $100,000/year household income, that is $1,250/month invested. If you invest that, making 8% annually for 35 years, you will have over $2.8 million. If you invested that lump sum at 4% annually in retirement, it will create more than $114k/year in retirement income while still having the $2.8 million lump sum. All-in-all, you need to be investing and investing a lot to create the income you will need in retirement and beyond. Buy large groups of stocks, keep buying, and don’t stop until you meet your goals. Compound interest is a strong force, so utilize it!

QUESTION 4: DO YOU OWN A HOME?

You need to invest to build wealth, sure. That said, what has long been the biggest contributor to household net worth has been real estate and home ownership. As of Q2 2022, 28.66% of household net worth was concentrated in real estate equity. In fact, over the last couple of years, Americans gained more than $6 trillion in housing wealth. This is too big an opportunity to miss out on. You need to own a home and get it paid for quite expeditiously. Not only that, paying off your home creates a huge amount of room in your budget, since you get rid of what was likely your biggest monthly expense. If I knew that something was the biggest contributing factor to net worth and would allow me to give, save, and spend more money with a looser budget, I would jump at the opportunity. Buying a house and OWNING said house is a game-changer over the long-term.

QUESTION 5: CAN YOU GIVE AWAY AND SPEND MONEY IN REASONABLE AMOUNTS WITHOUT WORRY?

When it’s all said and done, why do we want to be financially responsible? I don’t know about you, but it’s so I can spend more money. If you have no debt and/or no mortgage, you have more money. When you have emergency savings, you don’t have to use your income and debt to fund emergencies. When you invest, you are trying to grow your money so you have more to spend and can replace your income later. If you do everything right, you should be in the position to spend money freely, within reason. Spending is not even the only point, but I also believe we should all be giving. Giving is good for the soul. Give at all times, and you will have a greater appreciation for money and what it can do for you. We should all give, save, and spend to have a balanced, unselfish view of money and be good stewards of God’s provision for our lives.

FINAL THOUGHTS

The money game is not hard, but you have to enact decisive, planned action. Things will not always go your way, but if you are often reflecting on your financial position, you will be better equipped to change things that need changing and be motivated to win financially. Come back to these questions, check where you are at, and adjust accordingly. I know you can be financially successful and financially free, but you must be intense and intentional. Someone with no debt, an emergency fund, consistent investing, a home, and enough money to give and spend responsibly is in a good place to win. Start today!