Last spring, at the end of her school year, my daughter was preparing for a comprehensive final exam. She was nervous, and I remember reassuring her that all the work and study she had done over the course of the semester was going to pay big dividends. I emphasized that the test was simply going to be a recap of stuff she already knew. Refresh a bit, and it would be a piece of cake. She already had all the answers.
When it comes to money, you may not have learned the answers you need during your formal education or in any class you’ve taken -- and there definitely won’t be a written test. However, some principles of personal finance should be second nature.
Ready for a pop quiz? Here are six questions you should be able to answer off the top of your head.
1. What’s your number?
A million? Two million? Five? How much do you need for a financially secure retirement? Your number should be enough to cover your anticipated expenses, less the guaranteed income from sources like military retirement, annuities and pensions that you can count on. The average Social Security benefit is around $17,000 a year, and I’d encourage you to leave it out of your calculations. I’m not saying it won’t be there, just that I’d rather have it be the icing, not the cake -- as it is for too many Americans.
2. Who’s up next?
This question means different things to different people. If you’re a young parent, it might be about who will take care of your kids, if you’re gone. It might address who you have named to act as your agent in a power of attorney. Perhaps, it’s the successor trustee of your trust. Who will make medical decisions if you can’t? In any case, you shouldn’t hesitate with your answer.
3. What happens if I get sued?
You only need to watch TV for a few minutes to understand that a lawsuit could be right around the corner. Lawyers are lined up to make it happen and are clearly doing OK since their advertisements fill our airwaves. You can (and should) be careful, mitigating risks by practicing healthy behaviors like putting the phone away while you drive.
But if you are sued, is your liability insurance adequate? If you’re asking, “what liability insurance?” there’s a problem. Your liability insurance included within your homeowners and auto insurance provides a first line of defense if you are sued as the result of something happening at home or on the road. A personal umbrella policy may be a good addition to the base coverage offered in your other insurance.
4. How is healthcare funded? Whether you’re trying to decide between a high-deductible health plan paired with a Health Savings Account through your employer; pondering coverage between retirement and Medicare eligibility; or lobbying your congressional representatives to keep their promise by halting hikes to Tricare retiree benefits, health care is a game-changer and should be top-of-mind in your finances. You don’t want what many health experts swag as a quarter million-dollar retirement expense to be a surprise.
5. How’s my portfolio allocated? Well? I’ve had a lot of casual conversations with friends, coworkers and people I meet as part of my work. Too often, when I ask this question, I get a deer-in-the-headlights response. We are in a 10-plus year bull market. If you haven’t periodically rebalanced, it’s very possible that your portfolio is much more aggressive than is comfortable. I’m not predicting a bear market tomorrow, but it will happen.
It’s an exciting time at our house. My daughter aced her exam and has moved on to nursing school. I haven’t run these questions by her, but you can be sure I’m laying the groundwork for all of my kids to knock these questions out of the park. You should be able to handle them, too.