It’s time for a financial checkup.
Whether you’re just starting your financial journey or looking to reevaluate your current status, a financial checkup is vital to the financial planning process.
What is a financial checkup?
A financial checkup is a periodic assessment of your financial health. Like a medical checkup, it involves reviewing your finances to ensure everything is on track and helps identify opportunities for improvement.
A financial checkup typically covers several areas: income, expenses, savings, investments, debt, insurance coverage, and long-term financial goals.
Financial Checkups Include
- A budget review to determine if you’re living within your means.
- Assessing your savings accounts to ensure you have adequate emergency funds.
- Investments are reviewed to ensure proper diversification and progress.
- Debt is assessed to determine if you’re on track to pay off debt.
- Insurance coverage is reviewed to ensure adequate coverage for changing needs.
- Long-term financial goals are reassessed to ensure you’re on track and make any adjustments.
Let’s check your financial health.
Step 1: Take Stock of Your Assets
Begin by compiling a detailed list of your assets. This includes:
- Cash and Savings: Bank account balances, cash on hand, and any liquid savings.
- Investments: Stocks, bonds, mutual funds, retirement accounts (401(k), IRA), and other investment vehicles.
- Real Estate: The value of your primary residence, rental properties, or any other real estate holdings.
- Personal Property: The current market value of vehicles, jewelry, artwork, and other valuable possessions.
- Other Assets: Any other assets such as business ownership, intellectual property, or valuable collectibles.
List your assets, along with their estimated value, then add up the estimated values to get the total value of your assets.
The following is a sample asset list showing financial holdings across various categories.
| Asset Category | Description | Estimated Value ($) |
|---|---|---|
| Cash and Cash Equivalents | Checking Account | $5,000 |
| Savings Account | $10,000 | |
| Investments | Stocks | $20,000 |
| Bonds | $15,000 | |
| Mutual Funds | $25,000 | |
| Retirement Accounts | 401(k) | $100,000 |
| IRA | $50,000 | |
| Roth IRA | $30,000 | |
| Real Estate | Primary Residence | $300,000 |
| Rental Property | $150,000 | |
| Vehicles | Car #1 | $15,000 |
| Car #2 | $10,000 | |
| Personal Property | Jewelry | $5,000 |
| Artwork | $10,000 | |
| Electronics | $3,000 | |
| Other Assets | Business Ownership | $50,000 |
| Collectibles | $8,000 | |
| Total Assets: | $796,000 |
Step 2: Calculate Your Liabilities
Next, list all your liabilities or debts. This may include:
- Mortgage: The outstanding balance on your mortgage loan.
- Consumer Debt: Credit card debt, personal loans, student loans, or other outstanding loans.
- Other Financial Obligations: Any other financial obligations such as car loans or medical bills.
Total up the amounts owed on each liability to calculate your total liabilities.
| Liability Category | Description | Outstanding Balance ($) |
|---|---|---|
| Mortgage | Primary Home | $200,000 |
| Auto Loan | Spouse’s Loan | $15,000 |
| Student Loans | Federal Student Loans | $30,000 |
| Credit Card Debt | Credit Card Balances | $5,000 |
| Personal Loans | Debt Consolidation | $10,000 |
| Home Equity Line of Credit | HELOC (Home Equity Line of Credit) | $25,000 |
| Medical Debt | Unpaid Medical Bills | $3,000 |
| Other Debts | Any Other Outstanding Debts | $2,000 |
| Total Liabilities: | $290,000 |
The list provides an overview of outstanding liabilities and debts, helping you understand financial obligations. It’s useful when crafting a debt pay-off plan.
Step 3: Determine Your Net Worth
Once you have tallied your assets and liabilities, calculate your net worth by subtracting your total liabilities from your total assets. The resulting figure represents your net worth—the true measure of your financial health.
- Net Worth = Total Assets – Total Liabilities
A positive net worth indicates that your assets exceed your liabilities, while a negative net worth signifies the opposite.
Your net worth provides valuable financial insight and is the most important wealth benchmark.
| Assets | Amount ($) | Liabilities | Amount ($) |
|---|---|---|---|
| Cash and Cash Equivalents | $10,000 | Mortgage | $150,000 |
| Savings Accounts | $5,000 | Car Loan | $20,000 |
| Investments | $50,000 | Student Loans | $30,000 |
| Retirement Accounts | $100,000 | Credit Card Debt | $5,000 |
| Home Equity | $200,000 | Personal Loans | $10,000 |
| Rental Property | $150,000 | ||
| Other Assets | $20,000 | ||
| Total Assets: | $535,000 | Total Liabilities: | $215,000 |
| Net Worth: | $320,000 |
The simplified net worth statement provides an overview of wealth by comparing assets to liabilities. It’s a valuable tool for assessing overall financial health and tracking progress over time.
Step 4: Analyze Your Income and Expenses
Evaluate your sources of income and the breakdown of your monthly expenses. This involves:
- Income Analysis: Identify all sources of income, including salaries, wages, bonuses, rental income, investment income, and any other sources of revenue.
- Expense Assessment: Track your monthly expenses across various categories such as housing, transportation, food, utilities, healthcare, entertainment, and discretionary spending.
Comparing your income against your expenses allows you to determine your cash flow—the difference between your income and expenses.
- Cash Flow = Monthly Income – Monthly Expenses
A positive cash flow indicates living within your means, while a negative cash flow signals potential financial strain.
| Category | Inflows (Income) | Outflows (Expenses) | Net Cash Flow |
|---|---|---|---|
| Employment | $3,500 (Monthly Salary) | $3,500 | |
| Side Business | $500 (Monthly Revenue) | $500 | |
| Rental Income | $1,200 (Monthly Rent) | $1,200 | |
| Total Income | $5,200 | $5,200 | |
| Housing | |||
| Rent | -$1,500 | ||
| Utilities | -$150 | ||
| Transportation | -$300 | ||
| Food | -$400 | ||
| Entertainment | -$200 | ||
| Savings/Investments | -$1,000 | ||
| Debt Payments | -$500 | ||
| Total Expenses | -$4,050 | ||
| Net Cash Flow | $5,200 | -$4,050 | $1,150 |
In this example:
- Inflows (Income) include various sources such as employment, side business revenue, and rental income, totaling $5,200.
- Outflows (Expenses) cover essential categories like housing, transportation, food, entertainment, savings/investments, and debt payments, totaling -$4,050.
- Net Cash Flow is calculated by subtracting total expenses from total income, resulting in a positive net cash flow of $1,150.
This simplified cash flow statement provides an overview of cash inflows and outflows, helping track how money is spent.
Step 5: Review Outstanding Debts and Financial Obligations
Examine your outstanding debts and financial obligations in detail. This involves:
- Debt Analysis: Review the terms of your outstanding debts, including interest rates, repayment schedules, and any associated fees or penalties.
- Debt Prioritization: Identify high-interest debts that warrant immediate attention and prioritize debt repayment accordingly.
- Evaluate Financial Obligations: Assess ongoing financial commitments such as insurance premiums, subscription services, or membership dues.
Understanding your debt and financial obligations enables you to develop a repayment plan.
| Category | Description | Interest Rate (%) | Outstanding Balance ($) | Repayment Schedule | Associated Fees ($) |
|---|---|---|---|---|---|
| Credit Card Debt | Credit card balances | 18.99 | $5,000 | Minimum monthly payments | $50 late fee per missed payment |
| Student Loans | Educational loans | 5.50 | $30,000 | Monthly installments | None |
| Car Loan | Auto loan for vehicle purchase | 4.25 | $15,000 | Monthly installments | None |
| Mortgage | Home loan | 3.75 | $200,000 | Monthly installments | None |
| Personal Loans | Personal loan for home renovations | 8.00 | $10,000 | Monthly installments | None |
| Home Insurance | Annual premium for home insurance | N/A | $1,200 | Annually | None |
| Health Insurance | Monthly premiums for health insurance | N/A | $200 | Monthly | None |
| Gym Membership | Monthly dues for gym membership | N/A | $50 | Monthly | None |
| Streaming Services | Monthly subscriptions for streaming services | N/A | $30 | Monthly | None |
| Total Obligations: | |||||
| Total Debt: | $260,250 | $50 late fee for each missed credit card payment |
In this example:
- Debt Analysis: Each outstanding debt is detailed, including the type of debt, interest rate, outstanding balance, repayment schedule, and associated fees. Read more on how to pay off debt.
- Debt Prioritization: High-interest debts like credit card debt are prioritized for repayment. Learn about the debt snowball and debt avalanche methods.
- Evaluate Financial Obligations: Ongoing financial commitments such as insurance premiums, subscription services, and membership dues are listed for assessment. Find ways to lower your bills.
Step 6: Check Your Credit Report and Score
Review your credit file to ensure accuracy and get your credit score to determine how lenders see you.
- Credit report review: Make sure your credit report reflects your actual credit usage. Inaccurate information can happen and affect your credit health. Learn more about credit reports.
- Credit score analysis: Scores make it easy to understand how you manage credit. Higher credit scores signify that you can and do pay your debt obligations. Learn more about credit scores.
Knowing your credit standing can help determine if you can use leverage to build wealth or reduce the cost of existing debt.
| Category | Description |
|---|---|
| Personal Information | Obtain your credit score from each major credit bureau (Equifax, Experian, TransUnion) and compare them for consistency. Understand the factors influencing your credit score and take steps to improve it if necessary. |
| Account Summary | Examine your payment history for each account, including whether payments were made on time and whether there were any late payments, defaults, or delinquencies. |
| Payment History | Evaluate the types of accounts listed (e.g., credit cards, loans, mortgages) and ensure all accounts belong to you. Check for any accounts you don’t recognize or may be fraudulent. |
| Credit Utilization | Assess the average age of your credit accounts and the time since your oldest and newest accounts were opened. A longer credit history generally reflects positively on your credit score. |
| Length of Credit History | Check for any recent credit inquiries which may occur when you apply for new credit accounts. Multiple inquiries within a short period can negatively impact your credit score. |
| New Credit Inquiries | Review any public records, such as tax liens or judgments, that may be listed on your credit report. Ensure that these records are accurate and up to date. |
| Negative Items | Identify any negative items such as public records, bankruptcies, foreclosures, or collections accounts and understand how they impact your credit score. Consider taking steps to address and resolve these negative items. Learn how to dispute inaccuracies in your credit report. |
| Credit Score | Obtain your credit score from each major credit bureau (Equifax, Experian, TransUnion) and compare them for consistency. Understand the factors influencing your credit score and take steps to improve it if necessary. Find the best free credit score apps on phroogal.com. |
Use this table to thoroughly review your credit report, identify any discrepancies or issues, and take appropriate actions to maintain or improve your credit score.
Regular credit report monitoring is essential for financial health. Find the best credit monitoring apps to help you.
Step 7: Review Your Retirement Savings
Ensure your retirement is on track. Determine whether your current investment portfolio is on track to achieve retirement.
| Aspect | Description |
|---|---|
| Retirement Goals | Evaluate your retirement accounts’ performance and asset allocation, such as 401(k) plans, IRAs (Traditional or Roth), or pension plans. Review the investment choices within these accounts to ensure they align with your retirement objectives, risk tolerance, and investment horizon. |
| Retirement Accounts | Evaluate your retirement accounts’ performance and asset allocation, such as 401(k) plans, IRAs (Traditional or Roth), or pension plans. |
| Contribution Levels | Review your contribution levels to retirement accounts and consider whether you maximize contributions to take advantage of tax benefits and employer matches. |
Step 9: Check Your Investments
How are your investments performing? Are you on track to meet your retirement goals? Reviewing your current investment portfolio will help you determine what changes, if any, needs to be done.
| Aspect | Description |
|---|---|
| Financial Objectives | Identify other goals, such as saving for a home purchase, funding education expenses, or financial independence. Evaluate whether your investment portfolio supports these objectives. |
| Performance Analysis | Assess whether your investments meet performance expectations. Make adjustments as necessary to optimize portfolio performance. |
| Contributions | Determine if you can increase the amount you invest to accelerate reaching your goals. |
Tip: Aside from retirement accounts, consider investing in a general investing account. Learn how to open a brokerage account.
Step 10: Analyze Your Insurance Needs
Analyzing your risk exposure and ensuring adequate insurance coverage to protect against unforeseen events is essential.
- Assessing Insurance Needs: Consider your financial obligations, dependents, lifestyle, and potential risks you may face.
- Review Existing Policies: Verify that your policies provide adequate coverage amounts, and consider adjusting coverage limits or deductibles to better suit your risk tolerance and financial situation.
The following table provides a structured approach to assessing insurance needs and reviewing existing insurance policies.
| Aspect | Questions to Consider | Action Items |
|---|---|---|
| Life Insurance | What are your outstanding debts, such as mortgages, loans, or credit card balances? How much income would your family need to maintain their standard of living in the event of your death? | Determine the appropriate amount and type of life insurance coverage to meet your family’s financial needs. |
| Health Insurance | What type of health insurance coverage do you currently have, and does it provide adequate protection for medical expenses? | Assess whether your health insurance coverage meets your current and anticipated healthcare needs. |
| Property and Casualty Insurance | Are you adequately protected against potential risks such as fire, theft, vandalism, natural disasters, and liability claims? – | Review your property and casualty insurance policies, including coverage limits and deductibles. |
| Disability Insurance | Do you have sufficient savings or other sources of income to support yourself and your family in the event of a disability that prevents you from working? | Evaluate whether your disability coverage (often provided by employers) provides sufficient income replacement in the event of a disability. |
| Liability Insurance | What potential liabilities do you face, such as property damage, bodily injury, or legal claims? | Assess whether liability coverage protects your assets and future earnings from legal claims. |
| Long-Term Care Insurance | Do you have sufficient savings or insurance coverage to cover the costs of long-term care services in later life? | Assess your potential long-term care needs, considering age, health status, and family history. |
Learn more about insurance planning.
Identify Areas for Improvement
Finally, identify areas of strength and improvement based on your financial checkup.
Ask yourself:
- Are there opportunities to increase income or reduce expenses?
- Can I reallocate resources to maximize savings or investment potential?
- Are there any immediate financial goals or challenges that require attention?
By pinpointing areas for improvement, you can proactively address financial gaps and implement strategies to enhance your financial well-being.
