FINANCIAL PHYSICAL…
Financial Check-up After a Crisis
BY ROB WRUBEL, CFP
My daughter with Down syndrome has her annual physical this week. It was scheduled for mid-March, just like it is every year, but this year was different. The COVID-19 crisis caused her appointment first, to be postponed, and then canceled, as the medical system reacted to the sweeping pandemic.
S he runs on her high school track team and both her school and summer camp require an updated vaccination and health record each year. Like most of us, I hoped that schools, camps, sports, and her other activities would resume by the end of March and, like most of us, I was wrong.
Her physical will start with the aide taking her height and weight and asking some basic questions. The aide will then strap a flexible cuff to her arm, pump up a small balloon and listen for the blood to flow. The aide will write down numbers – 117 over 77 or 110 over 72. Taking blood pressure always seems like an odd way to start a medical exam and yet this simple test can give a doctor the information to identify heart stress and potential underlying health issues.
The COVID-19 crisis stress-tested our financial lives, and while there's no simple device to strap around our arms, there are finan cial measurements we can check to see how we are doing with our financial fitness. In the time leading up to the economy shutting down in March, unemployment rates were decreasing, stock market indices were increasing, and wage growth was positive. Those are usually the best times to take steps to improve your financial life. Unfortunately, more people act after a crisis highlights the weaknesses, and not when life is cruising along.
No matter what, today is a great day for a review. Take stock of these crucial measurements today.
1. Cash reserves. Financial planners like me recommend that families keep three to six months of basic living expenses for times of emergency. Why? There's no way to plan for emergencies. We can plan for birthdays, camps and vacations. Emergencies are sudden and unexpected. Someone losing a job, getting into an accident, or needing to visit a sick parent still needs to pay rent, buy food, and have insurance in place. The emergency fund is there to buy time to focus on fixing problems without creating a financial disaster.
2.Net worth. Bankers and accounts love a balance sheet; real people not so much. Still, it's valuable to know what assets you own, where they are located, how much they are worth and then to list your debts. Ideally you go through this exercise annually. Put the assets list at the top of a page and the debts at the bottom. Then, subtract your assets from the liabilities – the remaining value is your net worth. You want this number to be positive and growing each year. If it's negative, it should be getting smaller each year. Like a blood pressure reading, this simple figure measured over time is a great indicator of whether your financial life is headed in the right direction or not.
3. Debt to income ratio. Take a look at this important financial metric. Write down your monthly household income. Then, add up your monthly debt payments – for example, the amount paid for your mortgage, credit card, car loans and student loans. Divide the debt payments by your income. Lenders look at this number for the maximum amount of loans they will offer. The reality for you is that you want this number to disappear over time and to have no debt payments. My experience tells me that you want this number to be below 25% if you want to be able to start increasing your net worth. It's hard to scrape by, let alone put money towards emergency funds, retirement accounts and to fund a trust, if your money goes to lenders and not to your own accounts.
If you're not sure how to calculate your net worth or debt to income ratio, search the internet for apps and tools to help. Personally, I use Quicken to track my budget and the software includes a net worth review. Mint (at mint.com) and You Need a Budget (at YNAB.com) can help with budgeting and understanding your net worth. Zillow, Nerd Wallet and other sites have simple cal culators to check your debt to income ratio. Building emergency funds takes patience and small changes to direct money to savings. Apps like Digit and others can roundup or help redirect cash to savings, and others like Honey can help you find coupons to save money in the first place.
Winston Churchill famously said, "Don't let a good crisis go to waste." We are still in the midst of the COVID-19 crisis and with it, the uncertainty, anxiety and concerns for the future we all feel. We all have had more time at home – use some of it to review key financial measurements for an update on your financial health. Use this information to take steps immediately once restrictions to work and activities are lifted in your community.
ABOUT THE AUTHOR
Rob Wrubel is a CFP who has a daughter with Down syndrome. He is recognized as a leading expert on financial planning for families with special needs members. Wrubel has written two books about financial planning and special needs families — Financial Freedom for Special Needs Families: 9 Building Blocks to Reduce Stress, Preserve Benefits, Create a Fulfilling Future and Protect Your Family: Life Insurance Basics For Special Needs Planning — and he has been published recently by Law360.com and The Good Men Project. Wrubel holds the Certified Financial Planning (CFP®) designation, the Accredited Investment Fiduciary® (AIF®) designation from Fi360, and the Accredited Estate Planner (AEP®) designation from the National Estate Planning Council.