How Am I Doing Financially?

I get asked all the time by both clients and prospective clients – how am I doing? Personally, I like Chris Rock’s line on relative wealth: “If Bill Gates woke up with Oprah’s money, he’d jump out the window.” Perspective is an amazing thing.

It’s tempting to benchmark yourself against what “experts” say we should have at each age milestone. For instance, a commonly quoted rule of thumb is “At age 30, you should have 1 times your annual salary saved for your retirement.” The flaw with this is obvious: all of our circumstances are different. Maybe you have saved 1 times your salary by age 30 but your current circumstances don’t allow you to save more right now. Maybe you are a good saver but you are invested incorrectly and your money won’t grow at the rate you need it to.

That’s why we always encourage personal benchmarking. Compare your current situation with where you want to be – now and in the future. So, I usually answer the question, how am I doing, with a quick checklist of items to consider:

Your net worth: Just like establishing a weight loss goal, the first step is determining what you weigh now. In financial terms, your weight is your net worth, calculated as your total assets minus your liabilities (debt). Debt can be a real drag on people’s ability to save for their financial freedom, particularly young people with student loan debt. By using the one-size-fits-all rule of thumb above, you may have 1 times your current salary as an asset but, if your debt outweighs that, you may not be making the progress you should toward your financial goals.

Current cash flow: Examining your monthly and annual expenses can be an arduous, and eye-opening, task but it is a vital step toward evaluating your current situation. First, are you living within your means – spending less than you earn?

What are your financial goals? Would you like to retire at 65, 67? Or, do you dream of changing careers at age 50? Have you saved for your kids’ educations? After determining where you are currently – your current financial weight, if you will – the next step is to determine where you are going. A good financial plan will help you determine how much investment assets you will need to generate enough income to support you after you stop working and throughout your lifetime, specific to your goals.

What is the amount of your savings? While one’s net worth is instructive to your overall financial health, the current amount of your savings, and how it is invested, is an important measurement toward your end goal. But, only relative to your own personal goal, not your neighbor’s.

How much are you saving now? How much investment assets – savings – you require to meet your goals will determine how much you need to save each year to get there. Parkinson’s Law says that “work expands to fill the time allotted for completion.” (Anyone who has ever watched the Kentucky General Assembly at work understands this to the core) The financial version of this law says that “expenses will fill the amount of income available.” Let’s face it, if we have it to spend, we will. That’s why we always encourage clients to Pay Yourself First. Put the amount you need to save to meet your goals in your workplace retirement accounts or some other investment vehicle, and live on what’s remaining. You won’t miss what you never saw.

So, want a real answer to the question “how am I doing?” Rather than compare yourself to an arbitrary benchmark, compare yourself now to where you want to be.