Having a solid plan in place—and then following it—may help your financial well-being. These questions can help you see that you’re on the right track.
Understanding the current health of your finances starts with having a solid plan in place, but it depends on following the plan so you stay on track and continue working toward your financial goals. That’s where a financial wellness check can be useful. It can help you make sure you’re hitting the right milestones in your plan — and also help you check that your plan is working for you.
Where to start? Here, John Knowles, business support consultant with Wells Fargo Wealth & Investment Management Advice & Planning, shares six questions that can help set up your financial wellness check.
Are you adding to your investment accounts on a regular schedule?
Saving often and early is rule No. 1 because of the power of compounding. When you leave any investment gains in your account rather than taking them out, those gains have the opportunity to start earning returns, as well.
Taking full advantage of your employer’s retirement plan — typically a 401(k) — can be a good place to start. That includes contributing enough to qualify for any potential company match, something Knowles stressed to his daughter when she entered the workforce. “If the company is going to match you up to 5%, consider putting 5% in at least,” he says. Those nearing retirement may want to explore “catch-up” contributions that allow you to add more to certain retirement accounts.
Are your estate planning documents up to date?
Estate planning documents should generally include a will, health care power of attorney (POA), durable POA for financial matters, and a list of your accounts and their respective contacts and account access information. You might also consider including a net worth statement, life insurance policies, property deeds, and a list of assets for your children.
Knowles believes talking to loved ones is an essential part of estate planning. “Having those discussions, writing down your wishes, and then formalizing that through official documents is key,” he says.
Do you have an emergency fund?
Unplanned expenses, health events, or loss of income can disrupt the best of plans. A good rule of thumb is to have six months’ worth of expenses in an emergency fund.
You might need your emergency fund even when an event is covered by an insurance policy. “If a natural disaster such as a hurricane does significant property damage, it takes a while for the insurance money to kick in,” he says. “And it could take a while for your employer to reopen so you can resume working.”
Do you have a plan for paying for your child’s college education?
If you’re thinking about paying for your child’s or grandchild’s college education, consider starting to save soon after they’re born, Knowles says. “Make college savings a part of your monthly budget just like your retirement savings,” he advises. 529 plans and other college savings vehicles are worth considering.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
Are you being smart about taxes?
With accounts such as 401(k)s and Traditional IRAs, the money has the potential to grow tax-deferred. That means you pay taxes on the funds when you withdraw during retirement. But with choices such as Roth IRAs or Roth 401(k)s, you pay taxes on the money at the start, but then don’t pay taxes when you take qualified withdrawals. (Other specialized accounts, such as Health Savings Accounts and Flexible Spending Accounts, may also provide tax advantages.)
“It really boils down to not putting all your eggs in one tax basket,” he says. “Putting most of your wealth in tax-deferred savings accounts means when you withdraw your money, you may potentially incur a large tax bill. Diversification with taxes in mind can give you options to help you manage the tax efficiency of your withdrawals.”
Are you getting advice from a professional advisor on a regular basis?
Having a financial wellness checkup with a financial advisor and other professionals is like getting health input from a doctor, Knowles says.
Your financial professionals can evaluate your situation by taking measurements on a regular basis or whenever a significant life event happens, such as a job change, marriage, or divorce. This can help determine where you stand and what actions to consider. “Doctors don’t ask you what your blood pressure is, they find out,” he says. “Once they have all the data they need, they make a recommendation. In this case, it’s your financial professionals prescribing what may help improve your financial well-being after taking all the necessary measurements.”
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Traditional IRA distributions are taxed as ordinary income. Qualified Roth IRA distributions are federally tax-free provided it has been more than five years since the Roth IRA was funded AND the owner is at least age 59 ½ or disabled, or using the first-time homebuyer exception, or taken by their beneficiaries due to their death. Qualified Roth IRA distributions are not subject to state and local taxation in most states. Distributions from Traditional and Roth IRAs may be subject to an IRS 10% additional tax if distributions are taken prior to age 59 ½.
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