How to Pass Your Financial Physical

Health and wealth go hand in hand. Just as physicians recommend annual physicals for their patients, so do financial advisors suggest annual reviews for their clients. Everyone knows it’s harder to get in shape than it is to stay in shape; the same rules apply to money, going from a frivolous spender to a frugal saver.

The medical community offers the benefit of widely agreed upon benchmarks, researched and endorsed by MD’s and DO’s at organizations such as the CDC, NIH, or Surgeon General. For instance, the American Heart Association qualifies Hypertension Stage One as upper number 130-139 or lower number 80-89. The World Health Organization considers anyone with a body mass index (BMI) over 30 to be obese. The Mayo Clinic diagnoses individuals with average blood sugar levels of 5.7% to 6.4% as prediabetic. It is rare for physicians to disregard these universally recognized standards.

The world of finance can be murkier, with individuals often confused if they are in good financial standing or not. Organizations such as the CFP Board, NAIFA, and FPA compile polls and data to provide snapshots of the general public’s financial well-being, sometimes interspersed with general recommendations, but lacking the scientific approach known to medicine. Doctors may differ in the treatment plan, but a conclusive diagnosis is a conclusive diagnosis. There is the objectivity of someone with diabetes being someone with diabetes. Financial advisors routinely differ in both treatment plans and diagnoses. Finance contains subjectivity, which is how one person with $10,000 can feel rich whereas another with $1 million feels poor.

This article does not intend to provide a treatment plan, per say, that can be found in my book, “What Should I Do with My Money?: Economic Insights to Build Wealth Amid Chaos”, rather I will lay out benchmarks to help readers self-diagnose. What finance lacks in certainty, it makes up for in simplicity. No X-Ray machines are required. If you score at least seven out of ten, consider it a passing grade.

*Disclaimer: These are not universally agreed upon scientific principles. These are guidelines used by the author, a Certified Financial Planner™, based on real-world experience from advising thousands of clients over the past fifteen years.

1. You have an emergency fund of at least six months expenses in cash.

2. You exceed the median earnings of your age group: 25-34 years-old is $54,000; 35-44 is $65,150; 45-54 is $63,750; and 55-64 is $62,200 (Bureau of Labor Statistics).

3. You have an investment portfolio with monthly automatic contributions.

4. You cover at least 50% of your compensation with disability income insurance.

5. You zero your credit card balances every month.

6. You pay your vacations in full in advance.

7. You get your full workplace retirement plan employer match (i.e. 401[k], TSP, 403[b]).

8. You own a blend of term life insurance and whole life insurance.

9. You have a Will.

10. Your net worth increases each year.

EXTRA CREDIT- Your retirement plan contains both pretax and Roth allocations.

Some of these benchmarks vary in importance based on your stage of life. Someone near retirement may not have as big a need for disability insurance or term life insurance as someone in the middle of their career. Conversely, a single young professional trying to build their savings may not place as much emphasis on drafting a Will or committing money to an investment portfolio.

In the author’s opinion, weighting should be credited to each category based on the author’s four-step planning process of 1- Protection First, 2- Build Liquidity, 3- Eliminate High Interest Debt, and 4- Invest. If you score a 70, you’re probably doing okay. If you can score a 100 and hit the bonus question, you are likely in optimal financial shape. These guidelines are meant to offer a routine checkup, not a prescription plan. You should consult your own advisors and tax and legal professionals to discuss your situation.

Written by Bryan Kuderna.

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