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CNN Will Grade Your Financial Health

This article was written by in Money Management. 10 comments.


CNN is featuring a short survey to help you determine your level of financial health. The result is presented in a form of a grade from F to A+. My result was an A; I lost points for not having any life insurance. The survey does not ask if there are any dependents. Right now, I am the only person depending on my income for survival.

The survey questions visitors about annual income and your age in order to determine the healthy expectations for the other categories. For the highest score, your monthly housing payments should not exceed 28% of your gross income. That’s almost unheard of for many people who purchased houses in the past few years. Monthly debt payments should not exceed 36% of your gross income. CNN further suggests three months’ worth of expenses in a high-yield savings account. The editors also subscribe to the rule of thumb that suggests the percent of your portfolio invested in stocks should be 120 minus your age.

Also related to diversification, you will lose points if you have more than 10% invested in your employer’s stock. For life insurance, a category where I failed according to CNN’s algorithm, you should have enough coverage to provide a replacement for your income for at least 5 years, 10 years if you have multiple dependents. The survey asks about your contributions to and balance of your retirement account. If the combination of the two, while taking your age into account, results in a favorable outcome as judged by CNN, you will pass this question.

Here are my results.

Financial Health

Take the survey here and share your results!

Published or updated May 4, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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Points: ♦127,550
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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar Tyler

For some reason the program won’t accept ages under 25. I guess since I’m 24 I have an undefined financial health score.

When I ran through it as a 25 year old, I also ran into the life insurance problem. I was also downgraded for having only 80% of my portfolio in stocks, although I was considering my emergency fund and savings for the down payment on a house as being “part of my portfolio”. Am I wrong about that?

Mint.com recently started beta testing an application very similar to this. Each month they make sure you’re contributing to retirement savings, an emergency fund, etc. It’s pretty neat.

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avatar Luke Landes ♦127,550 (Platinum)

Tyler: The impression I got was the diversification question only referred to your invested portfolio and that your cash savings (emergency fund, house fund, etc.) shouldn’t be included in that question. I also looked at Mint’s new features last week.

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avatar kitty

I had a problem with this question too. I think they are way to aggressive. They use a formula of 120-age. I heard the recommendation of 100-age.

They told me I am too conservative too. I am 49 and I keep half of my money outside of the market – in cash/CDs/bonds. They told me I am too conservative, but I don’t care. My losses for 2008 are around 20% — a whole lot better than their portfolio would be. With their allocation, a 60 year old would have 60% of money in stocks. This type of allocation is the reason why some of the people who planned to retire can’t.

You should do what you feel comfortable with. Yes, savings and emergency fund should be excluded, but beyond that you should consider if you could possibly need this money at least within next 5, maybe even 10 years. If you would – this money don’t belong in the stock market.

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avatar Yana

I guess I’ll delete the one that doesn’t work.

http://twitpic.com/4jrd7

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avatar CS

The quiz was a gross oversimplification which may help people get a general sense of their financial health but shouldn’t be used as a guide to actually improve financial health. I got a B+ because I was dinged on two points: no life insurance (which I don’t need as a 24-year-old with no dependents) and too little invested in the stock market.

On the last point, I currently have 80% of my investable assets deployed in equities, with 20% in fixed income. It’s conservative for a 24-year-old, but:

(1) I’m saving for a down payment on a house. Once that down payment leaves the pool of investable assets, the % equities will increase.

(2) As a young person I don’t have a huge amount of savings, and a large chunk of that 20% fixed income is the cash emergency fund I have which covers 6 months of living expenses. This is a fixed amount that I’m not planning to add more to unless my circumstances change. Since 90% of my new investments are going into equities, my % invested in equities will only increase. But young people shouldn’t be penalized for being too conservative if a large part of their investable assets is locked into an emergency fund.

(3) The 120 rule (subtract age from 120 for % to invest in equities) does not adjust for a person’s risk tolerance. I’m only moderately risk tolerant, and I’m not going to invest in a 95%-equities portfolio just because a rule of thumb says I should; I’d much rather use a slightly more conservative mix because I know I can stick to it and not make stupid moves during market downturns.

I guess I can exclude my down payment and emergency funds from my “portfolio” allocation, but that’s not entirely correct since cash is a fixed income asset that should be considered as part of my total portfolio.

Bah.

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avatar wayne

I took the test and got a B+.
My unhealthy sections were in diversification. I am too aggressive with stocks (says I should be 80% stock and 20% bond) which ties into my other unhealthy area. My other was my retirement savings. It states I am not stashing away enough for retirement. My monthly contribution is low due to me taking steps to build cash reserves. Before the crash I was contributing 15% (and 90% stock and 10% bond mix) but went down to 6% for several months. Will be upping that back up to contributing 11% this month. Still low according to them.

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avatar Enrique S

I got a B. Not enough life insurance, and my retirement savings is too low. My 401k was a lot higher last year!

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avatar Miss M

I got a B for not enough life insurance and too much company stock. I don’t have dependents, why woud I pay for life insurance. And my company is employee owned, the stock is given to you for working there you don’t have to buy it, and the way the program is set up you can’t sell it! So what exactly am I supposed to do? Unfortunately these tools are oversimplified, but still fun to play with.

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avatar AnnJo

It seems to me “portfolio diversification” is almost always defined too narrowly as limited to participation in equity markets (stocks and bonds). Where, in that measure, does one put ownership of rental real estate or commodities or non-traded notes/contracts receivable or privately held business interests, or as CS points out, cash?

I know that market timing has a bad name in investment circles, but is it really a bad idea in a seemingly invincible bull market to bank some of your gains in order to have something to buy with when a bear tears through the house? Those bears always do show up. In ’07 and ’08, I sold a few stocks that seemed to have risen beyond any justification, and tried to persuade myself a “diversified portfolio” required me to buy some other stocks to replace them. That proved hard: everything I looked at seemed overvalued. Luckily for me, I dithered long enough that the crash came before I’d reinvested. Now I find plenty of stocks that look like reasonable buys AND I have the money to buy them with.

Nobody should buy stocks in the name of a principle like diversification if the fundamentals aren’t there. And IMHO an investment portfolio definitely does include cash as well as other investments besides stocks and bonds. Some of those other investments seem to run counter-cyclically to the equities markets, too, which is one of the key reasons for diversification in the first place.

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avatar Bud

I got a B. Investments too conservative, not enough retirement savings, and not enough life insurance. What the survey questions did not account for is I am going to retire with a pension, so the results were not completely accurate for my situation. It was still an interesting survey and gives me some things to think about.

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