Would You Pass Suze Orman's Financial Strength Test?

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KEY POINTS

  • Does your emergency fund need a boost? And are you paying off your credit card balance every month?
  • Are you saving enough for retirement? Do you have a will to save your loved ones extra heartache if you pass?
  • Suze Orman's financial strength test covers everything from your credit card habits to planning for old age. 


The popular finance guru has all the bases covered in this financial quiz.

Last month, Suze Orman included a financial strength test at the bottom of various posts on her site. It covers everything from how you use your credit card to whether you're prepared for old age and passing on. The popular author, presenter, and financial podcaster originally posted the test in 2017, but it still holds true today.

How do you fare? Are you a financial heavyweight? Can you answer yes to all the questions below?

1. Do you pay all your credit card bills in full each month?

Credit cards can be powerful financial tools. You earn rewards on your spending, get benefits such as insurance or fraud protection, and even qualify for sign-up bonuses. However you'll negate many of those advantages if you carry a balance. Charge only what you can afford to pay at the end of the month.

If you can't pay your credit card bills in full, you could wind up paying interest on your purchases. While some cards have zero-interest promotional periods, others charge APRs of 16% or more. Carrying a balance can also increase your credit utilization ratio, which in turn can damage your credit score

2. Do you have an eight-month emergency savings fund?

An emergency fund is a cushion against unexpected events such as a medical crisis or job loss. If you have a well-stocked emergency fund -- ideally in an accessible savings account that's separate from your everyday checking or other accounts -- you can weather any financial storm. Orman has upped her emergency fund recommendation due to the increased chances a recession could strike. She currently suggests her fans stash away 12 months’ worth of living costs.

3. Did you pay for the car you drive with cash or a loan of no more than three years?

The cost of buying a car is higher than ever. Unfortunately, one way consumers are dealing with the increased costs is to take out longer loans and spread the costs over a longer period. The trouble? They pay more in interest and run the risk their car could be worth less than they owe.

When it comes to paying for a new car, Orman says, "Your goal should always be to spend the least amount of money as possible on a car that meets your needs, finance it for as short a period as possible and then keep driving it many more years after the car is paid off." She also says you should never lease a car -- to her, you're sinking money into an asset you won't own at the end of it. 

4. Are you putting at least 10% of your gross salary aside for retirement?

Orman says the average American is way behind on their retirement savings. She would like to see us all set retirement goals and start saving through a work retirement plan, IRA, or regular taxable account. Orman suggests putting 10% of your salary toward your old age if you're in your 20s. If you're in your 30s, she thinks that figure should be 15%. If you're older, Orman wants you to push your savings rate up to 20%.

5. Do you have a long-term asset allocation plan for your retirement investments?

Asset allocation is the mix of stocks, bonds, and cash you hold. Orman points out that you need to decide on what percentage you want to hold, and check in periodically to make sure you're on track. Orman is a fan of investing for the long term, but she also points out that you can't leave it all completely on autopilot. If you aim to hold 70% in stocks and 30% in bonds, that balance might get out of whack if the stock market increases dramatically. Also, as you get older, you might want to change that ratio to decrease short-term risks.

6. Do you have term life insurance to ensure your dependents are protected?

Orman says you need life insurance if there's anyone who relies on your income. That could be children, spouses, siblings, or parents. Life insurance would mean those you care for and provide for wouldn't struggle financially if you passed away. Orman also suggests a term life insurance policy -- one that's in place for a set amount of time, which can often be more affordable.

7. Have you taken steps to manage your affairs in case you pass away or become incapacitated?

Orman says there are certain documents we all need in order to minimize the red tape and hassle for our loved ones in case something happens. These are:

  • A will. A will sets out what happens to your assets after your death.
  • A trust. A l​iving revocable trust is a way you can continue to control your assets while you're alive, but at the same time allow your heirs to avoid probate. 
  • A living will. This document sets out your end-of-life preferences. You can state your wishes for things like resuscitation, organ donation, particular treatments, and save relatives having to take those decisions on your behalf.
  • A power of attorney for healthcare and other matters. A power of attorney means you authorize someone to act on your behalf in certain situations. A financial power of attorney covers money matters, while a medical power of attorney covers your health.

Thinking about serious illness or death is unsettling at best. But Orman points out estate planning can save a lot of heartache for the people you care about. 

8. Have you checked all the beneficiaries of every investment account and insurance policy within the past year?

Unfortunately, making a will doesn't necessarily mean the beneficiary you name will receive everything as you intended. Let's say an ex-spouse is listed as the beneficiary on your IRA or insurance policy. The specific policies trump whatever is written in your will, so if you don't update each document, your ex could be entitled to the money. Check them over once a year to make sure your assets go where you want them to. 

How did you do?

If you didn't answer yes to all the above questions, don't panic. We can't all be financial superheroes. What is important is to make a plan and figure out how you can make progress in some of these areas. For example, if you aren't saving as much as you'd like toward retirement, perhaps you can increase your contribution by 1% now and then another 1% in a few months' time. Don't go crazy. It's always fun to ace tests, but in this case, what matters is to find sustainable ways to build strong financial foundations.

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