Are You Financially Stable? Here Are 6 Big Signs That Prove It.

In this edition of "Bank of Dad" our columnist walks through the things all financially stable have locked down.

by Daniel Kurt
Geo Barnett for Fatherly

Hey Bank of Dad. I’m 42. I’m married with two kids. I think we’re doing pretty well financially — some good investments, we have a decent rainy day fund, I’m always contributing to my 401k (company match). But it’s hard to be sure. What are some signs you’re financially stable or in good financial health, both big picture and small? — Taylor, Oregon

Good on you, Taylor. It sounds like you’re doing some things right by planning for the future and putting away some cash for the unexpected.

We do get this question a lot, and with good reason. People want to hit the pillow at night knowing that they aren’t neglecting their long-term financial needs. With that in mind, here are some of the key indicators that you’re in good shape:

1. Your Loved Ones Have a Safety Net

You’re healthy. You feel great. You have a huge chunk of your life ahead of you, right?

Well, probably. But the fact is, nobody I know of owns a crystal ball. So, if you have kids or a spouse who depend on their income, you need a backup plan should the unthinkable happen (however unlikely that is). It would be hard enough for your family on an emotional level — making them struggle to stay under the same roof or pay for the utility bill would make things even worse.

Make sure the insurance policy you buy has a death benefit that will cover your funeral expenses, any childcare or education expenses for your kids and outstanding debts like student loans and car loans. Your family may also need income replacement to pay for routine expenses like mortgage payments and grocery bills.

As long as you buy it when you’re relatively young and in good shape, getting a term policy is actually pretty darn affordable. In fact, a non-smoking 30-year-old man, for instance, can get a 20-year term policy worth $500,000 for roughly $20 a month, if he has a good medical history. Somebody your age may pay slightly more, but compared to the peace of mind it’ll give you, it’s a bargain.

There’s another type of coverage that often gets overlooked: disability insurance that pays you a pre-determined amount of cash should you suffer an injury or illness that leaves you unable to stay at your job. You may get some coverage through your employer, although some individuals choose to supplement that with a policy of their own.

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2. Your Savings Account Is Well Funded

You never know when life is going to through you a curveball, whether it’s a failing transmission in your car or news that your company is sending out pink slips to the folks in your department. Knowing you have a quick source of funds as backup can prevent you from having to radically rearrange your life — or accrue a huge balance on your credit card.

Most experts recommend having at least enough money in your savings account to take care of three to six months’ worth of living expenses. And now that online banks like Ally and Marcus are offering upwards of 2 percent interest for savers, it’s easier for that emergency fund to keep up with inflation.

3. Your Retirement Savings Are on Track

Delayed gratification is a concept many of us haven’t exactly mastered. Retirement is a long way off, but that sale at Banana Republic? It’s right here and now.

It’s easy to delude yourself with that line of thinking for a while — heck, maybe even a long while — but one day it’ll come back to haunt you. A better approach: putting 10 or even 15 percent of your paycheck straight into a tax-advantaged retirement account. If there’s money left over after paying your other monthly expenses, go ahead and indulge yourself on those ephemeral pleasures.

So how do you know where you stand when it comes to investing? According to the mutual fund titan Fidelity, you should have an amount equal to your annual income by age 30 if you expect to retire by 67. By age 40, it should be three times your salary. The younger you start investing, the better, since your account has more time to benefit from compounded returns.

4. You Have Health Coverage That Actually Protects You

Because Congress repealed the individual mandate, obtaining coverage for medical costs is completely up to you — at least in most states. But there’s a compelling reason why you should, regardless of what the government says about it: There’s a good chance that you’ll experience a medical expense at some point in the next few years that you can’t pay out of pocket. That can be devastating. A study earlier this year found that two-thirds of people filing for bankruptcy cited health care costs as a primary reason.

Those without insurance — or with skimpy coverage — are also more likely to forgo needed medical care. For instance, the research organization NORC at the University of Chicago recently found that 40 percent of respondents passed up a recommended medical exam or treatment within the past year because of the expense.

You don’t want to be in that boat. You may not need the priciest plan out there, but it’s worth getting the best coverage you can reasonably afford. If you’re really counting your pennies, you can even get short-term coverage for up to a year at a time. It won’t cover all of the conditions that an ACA-qualified plan will, but it’s certainly better than the alternative.

5. Your Net Worth Is on the Rise

It’s one of best indicators of how you’re doing financially. And yet many of us don’t have a clue what our net worth is, much less how to calculate it (that’s pretty simple, actually: It’s your total assets minus your total debts).

You may be saving a big chunk of your paycheck every month and diverting money into your 401(k), but that doesn’t mean as much if you’re racking up a huge credit card bill in order to pay for it. So, crunching your numbers every few months can be an invaluable exercise — and there are any number of net worth calculators online that can help you do it. If the number’s going up over time, you’re on the right track. If it’s heading in the other direction, some serious belt-tightening is in order.

6. The Kids Have Money in a 529 Account

This one is last for a reason: Your retirement and the financial protection of your family should take precedence over your kid’s tuition fee 15 years from now. After all, there’s no fallback plan if you don’t have enough money in your 401(k) — you just have to work harder. At least college students can take out a low-interest loan.

That said, if you’re meeting your other financial goals, socking away some money into a 529 plan is a terrific idea. As long as they use the money for a qualified education expense, your kids won’t have to pay capital gains on the money they pull out of the account. And if you start when they’re still in diapers, you can benefit from potential long-term growth in the market.

Unless you’re well-heeled, don’t worry about saving the entire amount of their higher education bill — at the current rate of tuition hikes, that’s a tough task indeed. The website suggests reaching 25 percent of their expected cost as a more workable goal for a lot of folks. And their college savings calculator happens to be a nifty little tool for finding whether or not you’re on pace to get there.