TOP DRAWER ARTICLE

Financial Fitness
by
HL Carpenter

Heads up! It’s time for a financial fitness check.

• Is your emergency cash stash underweight?

• Are your assets covered?

• Have your returns started sagging?

If you answered, no, yes, no, it’s likely you’re in good shape. Any other responses mean you may need to buff your finances. Here are some exercises to get you started:

Pump up your emergency funds. Want to increase your heart rate? Imagine losing your main source of income tomorrow. Would you have enough cash on hand to carry you until your situation improved?

How much cash is ‘enough’ is a combination of your usual monthly bills and the length of time you’d need to depend on your savings. To estimate the amount, add up essential expenses – the ones you can’t afford to miss, like the mortgage, car payment and groceries. Multiply the sum by the number of months you’ll be without income. In a thin job market, that could be half a year or more.

If the total you come up with is less than the cash you have stashed in a money market or savings account, you could be setting yourself up for problems.

Test the health of your insurance. Two aspects to consider: that you have the right kind of insurance, and that you have enough.

The right kind protects your most valuable assets – your home, vehicle and health. Enough means your coverage is in line with the value of those assets. For instance, coverage limits on your homeowner’s policy may be updated by a set percentage each year. If the homes in your neighborhood are not appreciating as rapidly as the insurance company calculates, you might have more coverage than you need.

Firm up your portfolio. Automatically depositing money into your mutual fund, DRIP plan or retirement account, then leaving the monthly statements unopened is like buying exercise equipment and storing it in the garage.

Keep your portfolio returns healthy by knowing what you own, and using that knowledge to maintain a balanced mix of assets. For example, you could complement a stock index mutual fund with a bond fund.

Caution: Buying three or four mutual funds does not necessarily create a ‘balanced’ mix. That’s because many funds hold similar investments. Read the fund information to avoid loading up on the same assets in different funds.

Now take a deep breath and congratulate yourself. You’ve just completed your first financial fitness workout. Isn’t it a great feeling to know you’re shaping up your finances and building your wealth?

Originally published October 2003.

Last update: January 8, 2011