Do you understand your overall financial health? Are you ready to handle unexpected financial situations? Your overall financial success depends on your readiness, so be prepared and you will prosper.
Start by evaluating your situation. Recently, USAA released a tool called the Financial Readiness Score.
While you can’t use the tool if you aren’t a USAA member, you can still use the methodology of the tool to figure out your financial readiness by using the four categories used to determine your score in your own personal evaluation.
Evaluating Financial Readiness in Four Categories
As you consider your financial readiness, you can break down your evaluation into four main categories. Here’s how to divide your finances up to tackle your readiness:
Spending: The first category to consider is spending. You want to make sure to live within your means. You are not financially ready on any level if you habitually spend more than you earn. Start by honestly evaluating whether or not you spend too much.
Once that’s done, move on to decide whether or not you are spending according to your priorities. Track your spending to see if you use your money in a way that reflects your values. If you aren’t spending in a way that makes sense for you, there’s a good chance you aren’t financially ready.
Saving: Look at the way you save next, as this is a major key to financial readiness. A good emergency fund can help you deal with unexpected financial setbacks and move forward with life. Your savings habits also determine how comfortable you will be in retirement, as well as whether or not you can meet other goals.
Make an effort to increase your savings — even if it means reducing spending in other areas. You don’t want an unexpected financial catastrophe to wipe you out.
Protecting: Don’t forget to protect what you already have. A big part of financial readiness is the right insurance. You need to protect assets like your home and your health. A natural disaster can mean huge expenses if you have inadequate homeowners insurance, and one hospital stay can devastate your finances. Don’t forget about life insurance if you want to protect your family in the event that you pass on. Review your insurance coverage and make sure it fits your needs.
Planning: Finally, you need to have a plan in place for the future. On the most basic level, this is about figuring out your will. You need to know how to divide your assets and who will take care of your kids. It also helps to engage in long-term tax planning as part of your retirement planning. Finally, if appropriate, consider the possibility of estate planning. You want to do what you can to preserve your legacy. It’s especially important to plan for your care and your estate in the event that you are incapacitated. You want your money to keep working for you, even if you can’t direct your resources.
Use these four areas to figure out your financial readiness, and you’ll be in a much better place going forward.