Financial planning looks so complex, and getting to a good financial position is so hard, is it not? The truth is that it is not so hard. When it all boils down to planning ahead and doing your best to avoid financial problems, it is not as hard as you think.
Now, you may have heard about or read about many ways to power-up your personal finance, including the famous 50/30/20 Rule. In this article though, we are going to tell you about a much simpler way to take care of your finances. Yes, indeed there is one strategy which is simpler than the 50/30/20 Rule. This is called the ‘5-Finger Checkup’.
What is the ‘5-Finger Checkup’?
This is a strategy to plan for your future, remove debt for good, and generally live the life you want. Yes, all that from the 5 fingers of your hand!
How does the ‘5-Finger Checkup’ work?
You have five fingers in your hand. Ask a personal finance-related question for each one of them. Here’s what you need to ask and for which finger.
Thumb: How much are you saving? Is it enough?
Index finger: Have you prioritized your goals?
Middle finger: Are you financially prepared to face unexpected events like medical emergencies, job loss, and the like?
Ring finger: Do you have paperwork prepared in case of your illness or death?
Little finger: Are you helping others financially, and if so, by how much?
Let us look at all of them, one at a time.
Saving enough: If you want to save enough you need to actually have money left over at the end of each month. There is no shortage of strategies to help you save enough, but most of these strategies take time and effort to understand and implement. To cut down on small unexpected savings, redirect small amounts to your savings.
Goal prioritization: You probably have several monetary goals. For instance, you want to buy a car, save for retirement, and so on. But you need to prioritize them. After all, you don’t want to sacrifice your retirement fund for buying a new car! If you prioritize these goals well, you can live the life you want. Having goals is important, of course, but it is also important to make them SMART goals. This means your goals need to be specific, measurable, achievable, realistic and time-bound.
Be ready for surprises: By this, we do not mean surprises on birthdays. We mean the ones that can severely tax your income and savings. These include job loss, medical and financial emergencies, and such. Do you have an emergency fund to meet these incidents? If not, start now.
Paperwork: When it comes to financial planning, it is important to have some of your key documents prepared. These are documents which make very important decisions possible when you are not able to take them. These instances include illness and death. Having such paperwork ready vastly reduces stress and confusion.
When helping others: It is not bad to help others at all, but you need to keep a tab on your own savings and income too.
Does all this sound simple? Maybe they are, but they are also very effective. Try it out!