Just as you prioritise your physical health with regular checkups, it’s equally important to monitor and take care of your fiscal fitness. An annual financial checkup allows you to assess your current financial standing, identify areas for improvement, and ensure you’re on track to achieve your long-term goals.
It might feel like a hassle, but a financial review can uncover hidden issues before they snowball into larger problems. Think of it as a preventative measure to prevent future financial headaches.
In this guide, we’ll delve into the essential components of a financial checkup, from reviewing income and expenses to seeking professional advice.
Why is a financial checkup important?
Life often throws curveballs at us, and our financial situations are no exception.
Unexpected expenses, job changes, or even changes of priorities in life are just some of the possible events that can negatively impact your finances. Having regular checkups allows you to catch any potential issues early on and adjust your financial plan accordingly.
Here are some other reasons why it is important:
- Identify areas for improvement: You might be surprised where your money is leaking from. A checkup helps you identify unnecessary spending habits and areas where you can optimise your budget.
- Monitor progress towards goals: Are you on track for that dream vacation or retirement? Having a checkup allows you to assess your progress towards your financial goals and adjust your strategy as needed.
- Peace of mind: Knowing your financial standing and having a plan in place reduces stress and anxiety. A review empowers you to make informed financial decisions with confidence.
- Prepare for the future: Life has a way of throwing surprises. The checkup allows you to ensure you have adequate emergency funds and better adjust your plans for the future.
Read more: How to Automate Your Personal Finances
Step-by-step guide to your financial checkup
Here’s a breakdown of the key areas to assess during your annual financial checkup:
1. Income and expenses
Tracking your income is the first step towards understanding your financial situation.
Gather documents like paycheck and tax records to calculate your total annual income. Make sure to properly stow away all these documents so that you can easily retrieve them when it comes to your scheduled checkup date.
Once you have a clear picture of your income, it’s time to review your expenses. This is where most people unearth hidden leaks.
Categorise expenses from the past year, including rent or mortgage, groceries, utilities, and entertainment. Utilise bank statements, credit card statements, or budgeting apps such as Planner Bee for a comprehensive overview.
Lastly, analyse your spending patterns to identify areas where you can cut back. Look for recurring expenses that seem excessive. It could be that you dine out too frequently, or have subscriptions you rarely use.
Bonus tip: Be mindful of the “Latte Factor”: identify small, daily expenses like takeout coffees that can add up significantly, and explore alternatives like brewing coffee at home.
2. Debt management
Keeping track of your debt is critical. One small mistake can quickly spiral into a financial disaster.
List down all your debts, including credit card balances, student loans, and car loans. Include details such as the outstanding amount, interest rate, and minimum monthly payment for each debt.
Once you have a clear picture of your debt obligations, develop a repayment plan. Prioritise high interest debts and explore different repayment strategies like the snowball or avalanche method. Choose the strategy that aligns best with your financial goals and risk tolerance.
Bonus tip: Consider transferring high interest credit card debt to a card with a lower interest rate or consolidating multiple debts into a single loan for easier management.
3. Savings and investments
Are you prepared for unexpected financial emergencies? What happens when you are faced with financial challenges?
These are some questions you can ask yourself to review whether your emergency fund is sufficient. Aim to have enough savings to cover three to six months of living expenses. Assess your current fund and adjust if necessary.
Next, evaluate your retirement savings.
Are you contributing enough to your retirement accounts? Use online calculators to determine if you’re on track for your retirement goals. Adjust your contributions or investment strategies as needed. Review any existing investments and consider rebalancing your portfolio if necessary.
Bonus tip: Periodically increase your retirement contributions whenever you receive a raise or bonus. Instead of immediately increasing your spending, allocate a portion of the additional income towards your retirement savings.
4. Insurance coverage
Regularly review your insurance policies to ensure they reflect any changes in your life circ*mstances, such as marriage, children, or home ownership.
Consider factors such as dependents, outstanding debts, and future financial obligations when evaluating if adjustments are necessary. Assess your health insurance plan to ensure it adequately covers your current needs.
Additionally, evaluate other insurance needs such as property and auto insurance to ensure you have adequate coverage.
Bonus tip: Don’t be afraid to shop around! Insurance companies offer varying rates and coverage options. Get quotes from multiple providers every few years to ensure you’re getting the best value for your needs.
5. Credit health check
Your credit report, a record of your borrowing history, plays a crucial role in your financial well-being.
Scrutinise your reports for any errors or discrepancies. Inaccurate information can negatively impact your credit score. If you find any mistakes, dispute them directly with the credit bureau and the creditor who reported the error. Also be on the lookout for suspicious activity like unauthorised accounts or inquiries. If you suspect fraud, contact the credit bureau and the creditor immediately.
Remember, a healthy credit score translates to better loan terms, lower interest rates, and improved access to financial products. Regularly monitoring your credit report and taking steps to address any issues is vital for maintaining a strong credit profile.
Bonus tip: Avoid carrying a balance to prevent accruing high-interest charges. Aim to pay your credit card bill in full each month to maximise your rewards and maintain a healthy credit utilisation ratio.
6. Estate planning
Do you have a will in place? A will ensures that your assets are distributed according to your wishes after your passing. If you don’t have a will, consider creating one with the help of a legal professional.
Review beneficiary designations on your retirement accounts, life insurance policies, and other investment vehicles. Ensure that your beneficiaries are up to date and aligned with your current wishes.
Bonus tip: Consider establishing a trust to provide additional control over the distribution of your assets and minimise estate taxes.
Can I do a financial checkup myself?
Yes, absolutely. Doing it yourself allows you to be familiar with each step of the process and with each review you will get better at it.
While self-assessment is beneficial, seeking advice from a financial professional can provide additional guidance and help you develop a comprehensive financial plan tailored to your goals and circ*mstances.
So, while you can certainly take the initiative to assess your finances independently, don’t hesitate to seek professional advice when needed to ensure you’re making informed decisions and maximising your financial potential.
Read more: Money Management Tips for Solo Living
Closing note
Maintaining a strong financial foundation requires proactive steps and regular assessments. Your annual financial checkup is a powerful tool to maintain control of your financial well-being.
Remember, this is an ongoing process, not a one-off event.
Schedule regular checkups, stay informed about financial literacy, and don’t hesitate to seek professional guidance if needed. With dedication and a proactive approach, you can achieve your financial goals and build a future filled with peace of mind and security.
