Life is uncertain. To protect your present and future financial well-being, conduct these 8 financial fire drills every 3-4 months.
Unemployment, high inflation, eviction, and health issues are all examples of life’s many uncertainties. Running routine financial fire drills at least quarterly is a responsible way to keep your ducks in a row in the face of such life uncertainties.
Embedding quarterly financial fire drills is also a great way to support your financial wellness journey. Though there is no one-size-fits-all, these questions will help you assess where you stand financially and help you secure your financial future.
How Long Would Your Emergency Fund Last?
If you needed to use your emergency fund starting today, how long would it support you?
The general rule of thumb is your emergency fund should be equivalent to at least 3 to 6 months of your personal expenses. Having sufficient savings to shield you from unexpected financial emergencies is a must.
Financial advisers typically recommend saving as little or as much as you can monthly to have a realistic emergency fund to keep you afloat.
Are You Spending More Than You’re Earning?
Ignorance is not bliss when it comes to finances. If you’re swiping your credit card mindlessly and indulging in impulse buying, it’s time to sit down and review your bank statements.
Impulse buying and overspending are costly money mistakes to avoid. Living within your means is imperative to achieving financial wellness and key to financial responsibility.
Ideally, your pluses (income) should outweigh your minuses (expenses). You should prioritize essentials over wants and leave room to save and invest before indulging in little luxuries.
With financial discipline, there are ways to effectively budget without penny-pinching.
What Is Your Credit Score?
Your credit score shouldn’t be unknown to you. Having a strong score can impact your ability to qualify for new credit. If you’re on the hunt to purchase a home, your credit score could likely determine your interest rate.
Keep in mind, late and missed payments negatively impact your credit score. Strive to make payments early, including medical bills, credit cards, student loans, etc. Continually make as many on-time payments as possible to aggressively rebuild your credit score.
Plus, early payments and doubling up on payments can help to minimize the interest accrued.
Do You Have Lingering Debt To Pay Off?
Taking stock of any overlooked debt that might be accruing interest is one of the most critical financial fire drills to run.
Have a strategic plan to pay all of your debt balances and know their respective interest rates. Debts with high-interest rates should be your top priority to avoid (or minimize) accruing interest.
If you have a credit card balance with a sky-high interest rate, throw as much money as you can towards it until it’s zero. Creating a debt payoff plan that’s actionable AND practical is wise if you have debt from different directions.
You can leverage the debt avalanche method to make minimum payments on all debts and pay larger amounts for the debts with the highest interest until all debts are paid.
It is also essential to weigh your borrowing habit. Are you taking loans for meaningful purposes or for leisure activities?
Have a one-on-one check-in with yourself about what you are using consumer debt for, and whether it’s worthwhile. It may take time to see (and feel) the progress, but it’s better than accruing a mountain of interest on debt with no repayment plan in place.
Do You Have A Retirement Savings Plan?
Have you started planning for your retirement? Take time to figure out how much money you expect to need for retirement and how much you may receive from social security.
Saving for retirement should be a long-term goal made into a practice of regular contributions. Consider consulting with a financial advisor if you’re interested in opening a Traditional IRA or Roth IRA to determine which is the best fit for you.
Also, be sure to explore options offered by your employer, such as a 401(k) employer match. Make sure you’re not leaving any money on the table.
Is Your Life Insurance Coverage Sufficient?
Take a second look at your life insurance coverage. It’s not a topic people want to really think about, but examining and understanding your life insurance coverage fully is financially responsible, and is particularly in the best interest of your family and/or loved ones.
Your expenses and income should guide you in choosing the amount of cover premiums you can afford.
Do You Have Disability Protection?
Disability protection may not be a priority for many, but it is something to not dismiss.
Disability insurance can provide you financial protection should you have a disability that prevents you from earning income. Insurance plans can be short-term or long-term.
For example, should you need to recover from an illness or a temporary injury, such insurance can come in handy.
Do You Have A Will (And Is It Updated)?
Writing a will, no matter your age, keeps you aware that life uncertainties are inevitable.
Arranging how your assets will be managed and how they will be distributed takes the pressure off your family members from financial distress should you pass. So, make sure you write a will or have yours updated, if needed.
The Takeaway
Quarterly financial fire drills can help structure and safeguard your financial future, and ease the stress and anxiety associated with life’s uncertainties.
Proactively running these one-on-one drills is a staple of financial responsibility.
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