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Your Financial Vital Signs, Episode #16 Thumbnail

Your Financial Vital Signs, Episode #16

The concept of vital signs is second nature for physicians. When it comes to personal finance, the idea is that these indicators not only provide a snapshot of your current financial life and help identify potential areas of concern, but they also give you a baseline from which you can then assess progress and improvement over time. In this episode, we discuss three financial vital signs, explaining what each is, how to measure it, and why it’s important to track over time.

Outline of this episode

  • Tracking your net worth [1:25]
  • Good debt vs bad debt [3:59]
  • Progress towards your goals [7:11]
  • Overall financial wellness [12:16]
  • Stress around investing [16:11]
  • Summary of the three vital signs [19:18]

What’s your financial net worth?

If there’s one number that best captures a snapshot of your overall financial situation, it’s your net worth. Your net worth is defined as your assets minus your liabilities. In other words, it’s what you own minus what you owe. Assets include things like your retirement accounts, other investment accounts, bank accounts, college savings accounts, or your home and car. Liabilities are things like your mortgage, student loans, car loans, or credit card debt. 

We like to track your net worth because it’s a simple equation that helps you see the big picture. For example, if you have $1 million of investments, but $1 million of debt, from a net worth perspective you’re worse off than someone with only $5,000 of investments but no debt. There are many different ways that you can grow your net worth, which we touch on, but at the most basic level you can either pay down debt or increase your assets.

Setting goals with purpose and revisiting them

The reason goals are so important is because if you don’t know where you want to be or what you want to achieve (at least a rough idea of it), it’s really hard to put together a plan for getting there and knowing what steps you need to take along the way, and if necessary, how to make adjustments between now and then. We always recommend breaking down goals by time period, long-term, medium-term, and short term, then prioritizing them by importance. For most people, it’s not possible to do everything you want all at once, so you need to prioritize. 

Assuming you’ve gone through the process of setting and prioritizing your goals, you’ll know how much you need to save each year for those goals. The other nice part of knowing what’s required to save each year is that it provides clarity about whether or not you’re on track. If you’re saving enough to meet those goals and are comfortable with your plan, that frees you up to either spend more today (guilt-free) or accelerate how quickly you reach other goals. That being said, we all know that life changes over time and priorities shift, so another important aspect of tracking progress towards your goals is periodically revisiting them to see whether any adjustments are needed.

What is financial wellness?

Financial wellness is having peace of mind around the decisions you make as they pertain to your finances. It’s also feeling content with the way you’re using your financial resources relative to your values and goals. There are several different aspects of this, but the first step is having the context of where you are today relative to the goals you have in the future.

Not every decision has to be the financially optimal one, but every decision should be intentional based on the trade-offs you’re comfortable with. Having the proper context and making intentional decisions is one of the best ways to achieve peace of mind around your finances, because it helps provide a feeling of control with your decisions and your money. 

Resources & People Mentioned

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