What Now?

Assessing Your Personal Finances in Good Times or Bad

In economic times like these, you may reach a point where you’re so overwhelmed by all the uncertainty surrounding your finances that you ask, “What now?” Well, perhaps the worst thing to do is to start panicking, and the best is to start planning. And even when times are better, reviewing your situation to make the most of any resurgence is a wise move.

Your net worth

Any assessment of your personal finances should begin with your net worth. To calculate this important figure, you need to create a net worth statement. Having information such as this on hand will help you visualize where your finances stand and see whether you’re in danger of straying from your financial goals.

What is your net worth? Simply put, it’s what you own, minus what you owe. Calculate your net worth by adding all of your assets, including:

• Cash and cash equivalents,
• Brokerage account balances,
• Retirement funds,
• Real estate and other fixed assets, and
• Personal property.

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Then subtract your liabilities, including mortgages, other loans and lines of credit, credit card balances, and taxes due. What’s left is your net worth, and seeing this number on a page (or computer screen) can really put in perspective just how you’re spending your money and whether you might be able to do more to grow your savings.

Of particular importance during uncertain times is liquidity. For instance, cash in your checking account is available on demand, while equity in your real estate requires you to sell the property to gain access to its worth. A common rule of thumb is that you should have enough liquidity to cover six months of expenses.

Employer-provided benefits

Once settled into a job, many people lose sight of their employer-provided benefits. Check in on them. Your W-4 withholding status, for example, may need revising if you’ve gotten married, had a child or incurred some other kind of significant life change. You might also want to change a beneficiary for your employer-sponsored retirement plan, such as a 401(k).

And speaking of your employer-sponsored retirement account, check your deferral amount to ensure you’re not putting away too much or too little. Do the same for contributions to your Flexible Spending Account or Health Savings Account (if you have them). Remember that these contributions are pretax, so they don’t reduce your take home pay by the full amount of the contribution.

Also keep in mind that 401(k) funds are protected from creditors. On the other hand, you can’t access the funds except in very limited circumstances. But your plan may allow loans in certain situations.

Insurance needs

Another key area to reconsider is your insurance coverage. Many people have seen their home values decrease recently, which may call for a downward adjustment in homeowners coverage.

Life insurance is another critical financial issue to assess. Do you have enough coverage? Too much? Ask your insurance professional to determine the right amount of coverage. If your personal cash flow is particularly slow, you might even consider withdrawing some of the cash flow of your coverage.

Depending on your coverage type and its terms, you may be able to take tax-free loans against the policy’s cash value. Typically, current loan payments aren’t required; the principal and all accrued interest are deducted from the death benefit when you die.

Also look into whether you need an umbrella policy. This coverage supplements the liability coverage offered by your homeowners and automobile policies and also covers things they don’t, such as medical bills and lost income. Long-term disability insurance also offers key protection in tough times. Ask your employer about whether your benefits package includes it — or could.

A good place to start

Of course, there are other elements to your personal finances, such as your banking arrangements or your IRA or other investments. But your net worth, employer-provided benefits and insurance are a good place to start assessing your financial standing. For additional help, ask your financial advisor.

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