Questions are a fantastic way to understand things better. They are vitally important in our everyday lives.
One area where I think they are underutilized is personal finance.
You NEED to ask yourself questions on the regular so you can discern if you are doing the right things and taking the correct steps for YOU.
In the following article, we’re going to explore the various questions you need to ask yourself in order to be financially effective.
What is my goal with money?
This is a fairly general question, so we’ll break it down into three buckets: short term, medium-term, and long term.
- Short-term (Under 2 years) – If you are saving for a short-term goal, what is it? A vacation? Down payment on a house? No matter the goal, that money will be used soon so the best place for it is in a savings account.
- Medium-term (2-10 years) – This could be anything from a down payment for a house to saving for your kids’ college education. What you do in the interim depends on when you’ll need it and the goal you are saving for. If it’s less than 5 years, I’d still recommend a savings account or short-term bonds. Something that can earn you a little interest, but is still relatively safe. That 5-10 year period depends on the goal. If there’s a particular dollar amount you need to it (down payment, for instance) I’d go no more than moderately aggressive. You want to earn a little, but you don’t want that saved amount to go under what you need.
- Long-term (10+ years) – Most often, a goal that’s over 10 years away can be invested in the stock market, though the percentage of your assets that’s actually in the market depends on the risks you are willing to take and when you need to access those funds.
Related reading: Financial planning for all ages
How much am I willing to lose before I sell?
I almost always propose this question to new clients because it gives me a good understanding of their risk tolerance.
If they are only comfortable with losing 10 percent of their portfolio, they’ll be invested pretty conservatively.
On the other hand, if they can tolerate a 50 percent drawdown and not bat an eye, then we can “put the pedal to the floor”, excuse the expression.
Determine how much of a loss you can stomach and that will give you a good idea of how to allocate your assets.
Related reading: Are you taking on too much investment risk?
How long will it take to adjust my allocations?
Questions regarding asset allocation, typically, pertain to risk and time horizon. For example, if you start saving for retirement when you’re 25, the majority of your portfolio will be in equities (stocks).
This allocation, generally speaking, is suitable for you for a couple of decades. At which point, you’ll probably (again, speaking generally) want to shift a little more of your portfolio to bonds.
Your allocation will, and should, shift over time, and once you get within a few years of your goal, the primary objective of your portfolio becomes capital preservation.
Related reading: Why asset allocation matters
Are my actions suitable for my current financial situation?
Financial situation takes everything into consideration (income, debt, spending, savings, etc.) Actions can be anything related to those items.
Specifically what I’m talking about is how much you are saving, how much you are spending, and how much $ you’ve dedicated to paying down debt.
If you have a sizeable amount of debt and not a whole lot of savings, it’s time to cut your spending. Conversely, if you’ve paid down your debt and are ahead of the game with your savings, it would be alright if you loosened up a little and enjoy yourself.
Like everything in life, your personal finances are a delicate balancing act, and when you ask questions, you can figure out how to shift your priorities.
How is my money being spent?
Kind of related to the last point. Tracking your spending to find out exactly where all of your dollars are going is an important step.
Another recommendation I usually make is to create a financial playbook. Here’s a brief outline of how I create a financial playbook:
- Big picture – List all assets and liabilities. How much you have saved and how much debt you have.
- List your necessary expenses – These are things that you have to pay (rent, utilities, transportation, food, minimum debt payments, etc.)
- List your monthly income
- Total up your monthly necessary expenses and your monthly income and see how much you have leftover. What’s leftover will help you discern what to do with it.
- I would list another line item for “fun,” though I would keep it to a minimum.
- What’s left after fun should be saved and used on debt.
Related reading: How to cut your spending
As I said in the beginning, questions help us understand the world, and ourselves, better.
Having a better grasp on why and when we make certain changes or do certain things is a must if we are to be more effective in managing our finances.
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: email@example.com