A New Autumn Tradition

A Quick Financial Check-up

BY » Peter Eisenhauer

There is never a bad time to review your financial situation, but let us suggest that early autumn might be ideal. Students are back at school, days are getting shorter, there’s a hint of chill in the air. Doing a recheck of your finances could join the other traditions of celebrating the harvest.

So why not gather your papers and devices, your partner if that applies, and go through a quick checkup on some key numbers?

“The goal isn’t necessarily to have fun, but there’s no reason not to make it enjoyable,” suggests Jeffrey Karp, President of Karp Financial Strategies, in Mooresville. “Put on some nice music, have a drink that you enjoy.”

It helps to bundle the serious business with some more obviously pleasurable things. In the end though, Karp says, the goal is to improve your future, and that is always worth some of your time.

As a starting point, you could take the items below, adapted from a list by finance columnist Kimberly Lankford. As Lankford writes, “A little time spent seeing where you land along the following financial yardsticks can either reassure you that you’re in good shape or give you the guidance you need to improve your situation.”

“A little time spent seeing where you land along the following financial yardsticks can either reassure you that you’re in good shape or give you the guidance you need to improve your situation.”

No. 1. Your cash flow

This is the first number to look at according to many experts. The reason is clear - the balance of your revenues and expenses shows your financial stability, it tells you if you are living within your means. How to get it: 1) add up all the money coming in by totaling your monthly income from working, annuities, pensions, investments and business income. 2) total your monthly expenses — housing, utilities, health care, food, insurance, debt payments, entertainment, etc. Your best source for this information may be your bank statements, credit card bills, and transaction records from online payment services. Many banks offer free online tools that categorize your debit and credit card payments. 3) subtract expenses from income.

What it tells you: if you are spending more than you are taking in, the amount of the negative cash flow number will tell you how long your savings will last. If you have a positive cash flow, knowing the amount helps you plan for goals, such as building savings for retirement, having an emergency fund, making major purchases, or reducing debt. Either way, the numbers gives you the basis for improving cash flow, either by finding ways to increase income, or lower expenses. A detailed look at expenses also helps in making decisions about how to spend — could you travel more if you moved to more affordable housing? Could you save on utilities and do more charitable giving? No. 2. Social Security and other defined benefits.

If you have already retired and are drawing Social Security, this is part of your cash flow calculation. But if you are not there yet, you want to have this number in order to know what to expect.

The statement will tell you how much you can expect to receive dependent on your earnings and when you claim benefits.

This information helps you plan based on how much you would receive if you drew when first eligible at age 62, if you wait until your ‘full retirement age’ (66 or 67 depending on your birth year), or the maximum benefit amount you would receive by waiting until age 70 to begin drawing benefits.

How to get it: Most people receive an annual statement from the Social Security Administration that gives you this information. For more timely updates and convenient access, you can get a ‘My Social Security” account at ssa.gov. Similar considerations may apply to other defined benefit pensions if you are in such a plan.

No. 3. Net Worth/ Savings

This is the value of your savings, other monetary and other investments and the estimated value of your home and other real estate (net of mortgage payoff).

One way to look at this number is to divide it by 25 and use that as an estimate of savings you could safely withdraw after retirement to supplement your Social Security and other income sources. Would that amount give you the income you needed for a comfortable retirement? If not, you may need to save more, retire later, or make other adjustments.

No. 4. Your credit score.

How to get it: Your FICO score is available free of charge from a variety of sources.

Scores range from 300 to 850, and you are looking to have a score that is at least 760 to get the best lending rates when you need to borrow. Paying bills on time and keeping balances low on your credit cards (30% or less of each card’s limit) are the major factors in this score.

No. 5. Debt-toincome ratio

Another measure of your credit standing is the debt-to-income ratio. How to get it: This is calculated by taking your monthly debt payments and dividing by your total gross income. The number is a standard for lenders (43% for mortgage) and a good gauge of your overall financial flexibility.

No. 6. Your highest interest rate debt.

How to get it: Checking loan documents and credit card statements, find the debt with the highest interest rate.

This number could also be called ‘your biggest win.’ Take for example a credit card charging 16% interest. Directing extra money to paying that debt off first gives you the biggest risk-free return you are likely to get on any investment.

If you have put these figures together — congratulations! If you are like most people you have probably found some numbers you are happy about, and some areas where you would like to do better. Finding the problem areas is a very positive step, since you can’t improve what you don’t see.

David Hedges, President of Bookman Bright, in Davidson, says the process of “getting their house in order” brings more than just financial benefits to his clients. “When you put your head on your pillow at night, you will rest better assured that things are set up they way they should be.” So celebrate the season with a financial checkup, and set yourself up for the adventures ahead.