Financial Self-Quiz

My wife received the following financial self-quiz from a friend, by email. I think it means to be helpful. I’ve never really understood the attraction of a self-quiz, but it seems to sell magazines in supermarket checkout lines. I include it only for entertainment; what I really don’t like about it is that I “failed” it.

Of course, it’s over simplistic and can’t account for many peoples’ individual situation. But it could all be summed up in the following couple questions which, incidentally, are among the first I ask of new clients.

1. How much do you earn?

2. How much do you spend?

3. How do you invest the difference?

If your answers are: 1. some number, 2. I don’t know and 3. what difference? you’re among the majority. But that’s small comfort. What your answers should be are: 1. some number, 2. some smaller number and 3. any strategy other than penny stocks or slots in Vegas.

Moving from where you are to where you should be is simple. But it takes some time and effort. I would suggest two simple steps.

First, gather your last three bank or credit card statements. Add up how much you spend in the three months and divide by three. That’s how much  you spend in a month. Or, multiply by four and adjust for vacations and holidays (like Christmas or birthdays) and that’s how much you spend in a year. Now you can compare how much you spend with how much you earn. Any decisions you make after that will be very personal.

Second, meet with a financial planner or an investment advisor. Asking around for referrals is a good way to meet a reputable advisor. Once you find someone you can trust, set up an automatic payment each month. It doesn’t matter whether you buy stocks, bonds, mutual funds or ETFs, as long as you’re developing the habit of investing.

Once you’ve completed those two steps, you’d pass my simple financial quiz. There are only two more items to address. How much debt do you have and when will it be paid off? When will you have enough investments to supplement your retirement income and provide the lifestyle you want? A financial planner can easily help you answer these questions. The answers will give you a timeline of when you’ll be financially independent or, in other words, ready to retire; if you’re not happy with the results, you will need to decide what changes to make to improve your timeline.

Making financial decisions doesn’t lend itself to multiple choice questions and answers. But finding a couple simple numbers can give you a very good idea of whether or not you’ll be able to retire on schedule.