Check Your “Financial” Smoke Detector

We all know it’s a good idea to check the smoke detectors once a month to make sure they are working properly, but let’s be honest; how many of us actually do?  If you’re like me, you probably don’t even know the smoke detector is there until you burn the toast.  It’s not that we don’t care about safety (although I do like to live on the edge).  Most likely it’s simply because it’s out of sight and therefore out of mind.

Just as forgetting to check the batteries in your smoke detector leaves you and your loved ones physically vulnerable, forgetting to put money away for retirement, college, or even a rainy day can leave you financially vulnerable.  According to our latest research, only about 60% of employees that have taken a wellness assessment report having an emergency fund and less than one in five report being on track for retirement.  These numbers are staggering and should be a warning that it’s time to check the “financial” smoke detector.

Check your emergency fund

Most financial experts suggest having 6 to 12 months of expenses set aside in an emergency fund in case of unexpected expenses or loss of income.  For a household that spends $5,000 a month, that can be a fairly sizable amount, so consider setting two goals for yourself: a short-term goal and a long-term goal.  Your short-term goal should be setting aside $1,000 within the next 12 months.  That breaks down to about $20 a week.  $1,000 in an emergency fund can help pay for an unexpected trip or the deductible on an insurance policy.

Once you achieve your short-term goal, consider setting your sights on a long-term goal, say reaching 6 months of expenses in the next 3 to 5 years.  This could help in the event of a job loss, temporary disability, or vacant rental property (for landlords).  Use this Saving for Goals calculator to determine how much you will need to set aside each month to reach your goal.

Check your retirement fund

For years, financial professionals have been advising employees to save 10% of their income for retirement, but with less than stellar market performance, coupled with expected reductions in Social Security and other employer-paid retirement benefits (e.g. pensions, retiree medical insurance), employees should consider putting aside 15% or more, especially if they are getting a late start.  Ultimately, the goal is to replace enough income in retirement in order to enjoy the retirement lifestyle you wish to have.  A rule of thumb that persists is to assume 80% income replacement will allow you to maintain your current standard of living in retirement.  Use this Retirement Plan Estimator to see whether or not you are on track to reach your goal.

Check your college savings fund (if applicable)

I doubt anyone would argue with the supposition that furthering one’s education beyond high school can often lead to greater financial opportunities, but how often are those potential financial opportunities curtailed by student loans and other financial chains.  If your student has more than a few years until they head off to college, there’s still time to save.  There are a number of tax-advantaged ways to fund a student’s education (see College Savings Plans), but you need to set a goal on how much of the cost of that education you are willing to take care of.  Some may wish to fund a portion or to simply cover tuition, while others may have a goal of covering the full amount.  Whatever your goal, use this Education Savings Estimator to gauge whether or not you are on track to reach this goal.

According to the National Fire Protection Association, the death rate per 100 reported fires was twice as high in homes without a working smoke alarm.  How many of these deaths could have been prevented if the smoke alarms had been checked regularly?  While forgetting to check your “financial” smoke alarm will likely not lead to death, it will likely leave you short of your financial goals.

Please remember to check your “financial” and “real” smoke alarms regularly.

 

 

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