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?