4 Key Personal Finance Questions

personal finance questionsObviously, being a personal finance blogger, I enjoy helping others think about their money.  Sometimes this involves sharing stories, and other times it might involve some analysis.

It can also involve asking questions.  Or, maybe more accurately, suggesting some questions for everyone to ask about their own finances.  Keeping an open mind and really inquiring about one’s own finances could be helpful.  A fresh perspective can be a good thing!

Here are four key personal finance questions to ask:

Are we making the most of our earning potential?

It stands to reason that income is a key part of the foundation of personal finance success.  If we don’t make money, we can’t save any.  Makes sense, right?

So, we want to make sure that we are making full use of our earning potential.  Income is important, and your career is like the engine that drives your finances.  Beyond that, side income seems to be more and more popular, as people try to monetize just about anything.  Money doesn’t grow on trees, so we need to work to bring in cash flow today and in the future (from our savings).

Are we saving enough of our income?

So, let’s say we have the first part covered and are making money.  That’s good! But if we aren’t saving any of it, we’ll be running in the proverbial hamster wheel until we get old.  That’s not good!

The more we can save, the better off our future can be.  When it comes to savings rates, every percentage point matters.  I know it’s often easier said than done for a lot of us, and to some degree it’s easier to save more money the more we make.  But really focusing on saving more of our hard-earned income will allow us to avoid working hard when in our later years.

Are we earning a solid rate of return on investments?

Now, we each have our own risk tolerance, investment timeline, and personal goals.  This impacts how we allocate our assets to different investment classes.

That being said, rate of return can have a big impact on net worth.  So, a portfolio that’s all cash and held for the long-term isn’t likely to outperform one that’s balanced between different investment classes.  There can even be diversification within a given class, such as funds instead of individual stocks, help keep returns from being extreme either way.

Are we managing our risks?

The last point, keeping returns from being extreme either way (especially to the downside), is important.  Just doing the math, it’s clear that rule number one is don’t lose money!  The basic example is that if you have $100 and lose 20%, you now have $80.  If you then want to get back to $100, you have to gain 25%.

Managing risks goes beyond investing of course, and could involve buying the right type of insurance.  This might even mean considering overlooked insurance policies, depending on your situation.  It could also involve preventing job loss, being smart when buying a home, watching our health, and so on.

Bottom Line:  If we stop periodically to ask ourselves these four questions, we can make sure we’re on track to do our best to grow our net worth and achieve financial success.

My Questions for You

Do you ever stop to ask yourself these questions from time to time?

Any other key personal finance questions to add?

Comments

  1. says

    These are great questions that everyone HAS to ask themselves. Many times I see people skip over #1. They are more concerned with saving money than making sure they are generating the most income they possibly can. After all, the more you make, the more you can potentially save. It’s way I stress that you as an individual are the greatest asset you will ever have.

    • Squirrelers says

      You’ve seen that too, eh? I know what you mean, many people go straight to saving as the default way to be financially prosperous, but we need income to save in the first place!

  2. says

    I’m constantly asking myself questions one and two; am I earning enough? And can I save more? This year I’m really tackling these two issues head on and setting more attainable quarterly goals to increase my savings. So far, so good. If I can stay on track, I should be able to bump up my savings the final quarter of the year to almost 34% of my income.

    • Squirrelers says

      That’s great, and 34% is an outstanding figure that beats what a majority of people are likely to do.

  3. Kathy says

    My mom was great at saving but horrible at investing. As a depression era baby, she grew up suspicious and fearful of the stock market and as she gained in savings, she would only “invest” in CDs at her local small bank. I could never convince her that banks were at risk as well. Does anyone think that FDIC really has enough money available if all the banks failed? Over her lifetime, Mom probably passed up several hundred thousand dollars in earnings because she wouldn’t put money in the market.

    • Squirrelers says

      Kathy – while unfortunate, that’s a really good example that you’re sharing of the importance of rate of return. You know, I think that with depression-era folks, there are probably some things they can’t see but also some lessons they learned that we could probably apply!

  4. says

    I think I do ask myself these questions (and others), but I’ve never really thought about them in the structured way you present here. Very helpful! I’d also comment that the relative importance of these questions might change as we age and progress through life’s stages. For example, we’re at the point that we have a decent nest egg saved, so I find myself thinking more now about managing risk–I don’t want to go backwards, financially!

    • Squirrelers says

      Kurt – That’s a great point you make about how the relative importance of these questions can change over time. Totally makes sense that you would be thinking more about risk management now.

  5. says

    I like this a lot. As a project manager, I spend a lot of time managing risk, which is a concept many don’t think of or tend to overlook. That you included it in a ‘Top 4′ type list is pretty awesome.

    • Squirrelers says

      I didn’t know you were involved in risk management in some capacity. That must be a good skill to have translate over to personal finance!

  6. says

    I am constantly asking myself these questions. I doubt I could earn more, because I think my employer is paying me too much already. As long as they keep giving me raises, I am happy. Saving for my family is relatively easy. I am always on the lookout for spending creep. Investing risk is set by our 50/50 asset allocation. As far as getting good returns, we are using low-cost index funds to get market returns. Considering that most people do not beat the market, we are getting the best returns possible.

  7. says

    I’m a Teacher so the answer to question #1 is no, we haven’t received a raise in 6 years! I am taking on additional leadership roles on campus which has boosted by income which helps. I feel I’m pretty well protected by insurance and that’s really important to me. I couldn’t imagine not having my income, health, life, and home unprotected!

  8. says

    These are great questions that my wife and I definitely do ask ourselves. We spent the last year or so addressing questions 2-4, and now we are focused on boosting up our earning potential at our day jobs and through side hustles.

  9. says

    I also like to ask if I’ve had any lifestyle inflation that I need to adjust for. It’s easy to let expenses creep up as we start to earn more money and forget to increase our savings goals. I like to see if there are more ways I can save and bring my expenses down.

    • Squirrelers says

      So true, it can be very easy for expenses to go up as we earn more. Keeping that in check can help us actually capitalize on our income gains!

  10. says

    Great questions., thanks for reminding me about this, especially that you divide them into four main categories. I realize that we need some kind of goals to keep in mind so we can increase our personal net worth, and these questions help to keep us on track.

  11. says

    Great questions. I wish I had of asked myself some of these questions when I was younger, especially if I was maximizing my income. I was so focused on saving and investing that I accepted a substandard income.

    • Squirrelers says

      I think that what you describe happens to a lot of people. Actually, missing out on one of the four questions, regardless of which one, probably happens to many folks. It’s great to be able to recognize this at some point, which obviously you (and I) have done.

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