How secure is your financial life? A Self-Evaluation Checklist

Last Updated on October 1, 2023 at 6:19 pm

Here are a set of questions to determine how secure your financial life is. Personal finance is all about protecting our family against extreme situations (aka outlier risks). Everything we do, buying insurance, saving, investing etc., falls under this protection act.

So let us get started. Don’t worry if you answer “no” or “not yet” to some questions. You can use our free guide to sort things out: Free ebook: Re-assemble Step-by-step money management basics.

We recommend working on a couple of questions per week. We are confident that you will soon have complete control over your financial life and feel secure.  Obviously, this list is not exhaustive, but hopefully will cover the important bases.

We will model it like a three-act play. Act 1: Preparation; Act 2: Action; Act 3; Review

Act I: Preparation

1. Is my life insured adequately? That is, will my family be able to handle their immediate, short-term and long-term goals in my absence?  Sometimes a one-crore insurance cover is enough, and sometimes it will not be enough. Use this free insurance calculator (link points to Excel file) to find out. When you are ready to buy, see: How to choose a term life insurance provider in 30 minutes!
2. Have I discussed with my spouse or nominee how the term insurance amount should be utilised in my absence? You can write a detailed note about this if your spouse finds it too morbid to discuss this. Just be sure to include the detailed note along with the policy papers. You can also include the contact details of a fee-only financial planner for guidance. Build a continuity kit for your family
3. Are I and my family members insured adequately wrt medical expenses independent of my employment? This seems like a no-brainer, but I am appalled to see that people consider mediclaim expenses as a waste of money if they don’t claim and take employee benefits and their own health for granted. See: Select the right health insurance policy with these free resources.
4. How ready am I to handle emergency expenses? You need more than six months or 12 months of expenses. Remember that cashless hospitalisation does not mean cash-free hospitalisation. You still need to pay for ‘non-medical expenses.
5. How capable am I of replenishing my emergency fund if it gets depleted?! Don’t lock all your monthly inflows into EMIs and SIPs. You need a small buffer to replenish the emergency fund. Until your networth becomes significant, allocate 5% of your income to the emergency fund.
6. Have I listed all my goals: recurring, short-term (less than five years away), intermediate-term (5-10Y away) and long-term (10Y+ away)?
7. Do I know the approximate but realistic current cost associated with my goals?
8. Have I decided on the asset allocation for my intermediate and long-term goals?  For short-term goals, it is 100% debt! The asset allocation gives you the net portfolio return you are aiming for. For example, if you expect 12% from equity and 7%from debt (both post-tax returns) and would like to have 60% equity exposure, the net portfolio return is (approximately): (12% x 60%)+( 7%x40%)
9. Do I know how much I need to save or invest for each of them?  A tool like the freefincal robo advisory template can automate these steps and provide an asset allocation schedule suitable for each goal.
10. If I cannot invest as much as I should, how am I going to manage it?  Some options: postpone goals, reduce targets, and increase investments down the line. Don’t make the mistake of increasing exposure to volatile instruments to compensate for lower investments with higher returns. It could backfire terribly.
11. Have I discussed all this with my spouse or partner? Have I written down an investment plan? A written investment plan helps everybody, especially those who cannot discuss financial matters with their spouse. See: How to help our life partner manage money in our absence

Act II: Action

1. Do I know what category of instruments (e.g. what kind of mutual fund) I am going to choose for my goals? The actual products come later. The categories required to create a diversified portfolio come first. Products are last.
2. Is my proposed portfolio diversified within each asset class?
3. Have I begun investments as per the asset allocation decided?  Not all goals can be handled at the same time by everyone. Retirement is priority number one.
4. Am I tracking my investments? Am I investing enough and as per the schedule assumed in goal calculation? Am I trying to increase my investment as much as possible each year? See: Why increasing investments each year is crucial for financial freedom.
5. Have I written a will?

Act III: Review

1. Do I know the net return (XIRR) of my debt investments and equity investment? Do I know the net XIRR of the portfolio? Is this above or below the expected portfolio return used in the goal planners? See: Track your mutual fund and stock investments with this Google Sheet!
2. Do I know what the current actual value of goal portfolios is?  Do I know how much they are actually worth? If I don’t invest anymore for these goals, how much would the current value grow to when I need the money?
3. Do I know how many years I can survive on an inflation-indexed monthly income with my retirement corpus If I retire today? Let us call this X year.
4. Am I increasing this X year by at least one year for each year that I work?  This is the true measure of a retirement portfolio.

If you want guidance on how to implement these steps, our free ebook: Re-assemble Step-by-step money management basics will help.

If you want some help in designing your portfolio, watch Basics of portfolio construction: A guide for beginners.