The BFS Way to Diagnose Your Financial Health

There seems to be all sorts of ways to measure your financial health, but here’s the list of points I'd keep an eye on:

1)  Am I spending significantly less than I earn? If I’m not, I’d take a look at my spending, make a budget, and cut the unnecessary expenses. If that didn’t fix it, I’d look into getting a better-paying job or at other income sources.

2)  Do I have a solid emergency fund? If I have at least 3 months of expenses (preferably 6 months or more), I’d move on. Otherwise, I’d start funneling cash into an emergency account. Even starting with $50 a month is better than no backup fund at all.

3)  Am I saving enough for retirement? I’d take a look at a few retirement suggestions and figure out if I’m on track. If I’m not, I’d look into my options. Do I have a 401k, IRA, or a Roth IRA? Would one of these work for me?

4)  What kind of debt do I have? If I do have some, I’d make a little list and see what I could eliminate. I’d start paying off high interest debt like credit cards before attacking car loans and mortgages.

5)  Are my investments diversified? If all of my retirement savings is tied to one stock (like my company), I’d DIVERSIFY. I don’t want my entire future to rest on the back of one company.

6)  Am I insured correctly? If I have health insurance, car insurance, short-term disability, long-term disability, and life insurance, I can move on. If I’m missing any of those, I’d look into my options. I don’t want to be at the mercy of anyone if I get into a car accident and can’t work. I also don’t want to die and leave my spouse with a financial mountain to climb while he’s grieving (he better be grieving…)

7)  Do I have estate planning in place?  If not, I need to set it up for the same reasons I need life insurance.

8)  Am I happy? If I’m not happy with my fiscal life, I need to figure out why and make some changes. For example, I didn’t think we had a good enough plan a few years ago. We came up with a system that made my husband and me happy.

I'll be posting further about each one of these points in the coming weeks to flesh out the ideas.

How’s your financial health? Do you think I missed anything important?

Determining Our "Allowances"

As a few of my last posts mentioned, my husband and I get $75 each every month for “fun” money and $100 to use jointly for date nights or other shared entertainment expenses.  Coming up with this system actually took us a few years. 

The idea of an “allowance” was a turn off in our early twenties.  We thought we were frugal enough that we would just naturally choose not to spend much.  That lasted for a while until I realized that I wouldn’t allow myself to buy anything and I resented my husband’s big purchases.  I’d buy gifts for others, but I kept putting off everything I really wanted (like a pair of discounted Crocs for $30 or even a new pair of $15 jeans).  Then I’d see hubby spend $100 on Magic: The Gathering and feel like the world was ending. 

I think I was somewhere between a nag and an outright b…well, you know.  That’s when my husband insisted on a new system and I whole-heartedly agreed.

We decided that we’d get allotted “fun” money and I’d stop critiquing those purchases.  We chose a total of $250 a month since it would work based on our current spending and that $100 of it should be put aside since we go out together frequently and didn’t want to handle a silly “who’s paying” situation. 

Since then, I’ve developed a healthy addiction to Shirt Woot and a slightly annoying addiction to ABC Distributing…I never knew how much I craved cheap junk…seriously, I have to watch myself.  I still don’t come anywhere near my $75 limit, but I don’t freak out anymore when I decide to splurge a bit (like my $35 work Crocs or my $11-$16 funny shirts).

My hubby saves up for a few months, spends it all, and starts over.  It seems to keep him happy although I know he wishes he had more than $75 to work with…maybe after one of us gets a raise. 

I try much harder to accept his 60,000 MtG card collection and I’m even supportive of his new obsession with Curling. 

All I can say is allowances aren’t just for kids anymore…which is ironic since I never had one then either.  :-)

What system do you use?  How do you successfully budget in the fun?  LOL...shameless plug...

General Steps to Financial Stability

Before I start posting specific spending scenarios, I wanted to post a general idea of how you could cover your basic financial bases.  Please disregard if you are beyond this of course.  These are the steps we use:

1. Create a budget after monitoring your spending and income for a month.  This will need to be updated with forgotten items as you go.

2. Pay all necessary bills.

3. Set up an emergency fund for at least 3 months (see below for the rest).

4. Maximum matching to your 401k.

5. Max out at least one Roth IRA.

6. Add small "fun" money allowances into the budget.  This is important to keep yourselves on track.  Without a little "fun" money breathing room, you'll catch yourselves splurging more often...this could slow down your progress quite a bit.

7. Overpay your mortgage to at least the nearest $100. We overpay to the $100 after that for a total of an extra $160 a month. Continual extra principal payments will save you thousands in interest.

8. Hit your specific goals - In our case, we put money aside for my husband’s graduate classes, extra into our emergency fund since we want it to be large enough to cover at least 9 months, a set amount aside for stocks, and we put a small amount into our vacation account for annual trips and large "fun" purchases.

9. Open another Roth IRA...we'll be doing this with the unneeded graduate school money this year.

10. Pay down your mortgage or save for future investments.

Even if you can't hit all these steps at one time, simply make it as far as you can...you'll be surprised how fast you'll start building actual wealth. 

We are currently on Step 8 although we are on track to hit all ten steps this year.  I will keep you updated as we go.  :-)

Do you see anything missing above?  What kind of system do you use?