Financial Health Check: Your 5-Step Money Checkup Plan

A financial checkup is a process in which you thoroughly review your finances and how you are tracking against your goals. It’s the financial equivalent to an annual physical with your doctor.

A financial checkup can be an important step in achieving financial wellness, which means meeting your money obligations today and also funding your future goals. Regular financial health checks can help you see how well you’re doing. What’s more, they give you the opportunity to pinpoint where you might be able to improve your money management strategy.

If you’ve never done a personal financial health check before, fear not. Getting started is easier than you might think.

What Is a Financial Health Check?

A financial checkup is a thorough review of your personal finances. For example, some of the things you might review as part of a financial check include your:

•   Monthly budget and expenses

•   Assets, ranging from money in a savings account to equity in a home

•   Debt situation and repayment strategy

•   Credit reports and scores

•   Retirement savings

•   Emergency savings

•   College planning, if you have kids

•   Insurance needs and coverage

Those are all things that can go along with setting up a financial plan, which is a strategy for managing your money to reach your personal money goals. You can complete a financial check and financial plan yourself or do so with the help of a professional financial advisor.

Why Is an Annual Financial Checkup Important?

A financial health checkup can help you establish where you are with your money, where you’d like to be financially, and what steps you need to take to get there. Completing regular personal financial checkups can guide you to improve your financial health as you work toward your goals.

For instance, money checkups could help you to:

•   Get clarity around budgeting and expenses

•   Eliminate bad spending habits so you don’t overdraft your checking account

•   Set financial goals for the short-term and long-term

•   Instill a sense of financial discipline as you work toward those goals

•   Develop a habit of saving consistently

•   Create an actionable plan for paying off debt

•   Form a workable strategy for retirement savings

•   Fine-tune your investment goals

Taking those kinds of actions can get you on the path to living your personal definition of financial freedom. That might mean retiring early, for instance, or finding ways to create passive income so you can live a lifestyle that isn’t job-dependent.

Skipping regular financial checkups can make it more difficult to do those kinds of things and put your financial security in danger. Essentially, financial checkups are a key part of managing your money.

5 Steps to Conduct Your Financial Health Check

It may be a good idea to do a personal financial check at least once a year. For example, you might schedule it for the beginning of January. That way, you can review the previous year and set goals for the upcoming year. Quarterly checkups may be a better option if you’d like to get smaller snapshots of your finances throughout the year.

Whether you do your financial checkup yourself or hire an advisor is entirely up to you. An advisor can offer an extra set of eyes to review your finances but it’s important to know what you’ll pay for that help. The average financial advisor cost is around 1% of the assets they manage annually, but you might also be able to pay a flat or hourly fee. It’s worth doing some research to see what might be available.

Now that you’re ready to start your financial health checkup, here’s a simple step-by-step plan you can follow.

1. Calculate Your Net Worth and Financial Vital Signs

Getting some numbers down on paper can be a good way to start your financial checkup. Looking at certain metrics for the last 12 months can give you some perspective on where you are financially. Here are some of the most important measurements to take:

•   Your monthly income and expenses

•   How much you have saved for emergencies

•   What you’re carrying in total debt

•   Debt-to-income (DTI) ratio (i.e., how much of your income goes to debt repayment)

•   Your credit scores

•   How much you’ve invested for retirement

•   What percentage of your income you’re saving monthly

Along with looking at specific numbers, it can also be helpful to ask some basic questions to gauge your financial health. For example, you might ask yourself:

•   How many months did I stick to my budget vs. going over budget?

•   Have I bounced any checks or overdrafted my bank account this year?

•   Was I late paying any bills in the past 12 months?

•   Did I reach any savings goals or fall short of any goals?

•   Did my overall debt load increase or decrease?

•   How well did my investments perform?

The purpose of looking at numbers first and asking these kinds of questions is to establish your financial baseline. You can then move on to the next steps to take a deeper dive into your money situation.

2. Audit Your Budget and Cash Flow

Setting up a budget if you don’t have one can help you plan out your spending and sauvignon each month. The basic elements of a budget include:

•   Fixed expenses, such as housing

•   Variable expenses, which need to be paid monthly but their amounts may change (such as food costs)

•   Discretionary expenses or the “wants” in your budget

•   Income

•   Debt repayment

•   Savings

You might also include taxes as its own budget category if you’re self-employed. In this situation, you will need to set aside money regularly to pay estimated tax bills.

If you’re doing a financial checkup for the last 12 months, it can be helpful to look at what’s changed in your variable and discretionary expenses. For example, are you paying more for utilities than you were 12 months ago? Has your grocery bill increased? Is a bigger chunk of your budget going to things like hobbies, entertainment, or recreation?

Analyzing individual budget categories can help you pinpoint money leaks or areas where you might be able to cut back on spending. It’s also a good opportunity to review what you’re paying for things like cell phone service, internet, and car insurance to see if it’s worth switching to a cheaper provider.

3. Evaluate Your Emergency Fund and Savings Rates

An emergency fund is money that you save for unplanned or unexpected expenses. Emergency savings is meant to be separate from money you save for various short- and long-term financial goals.

If you have an emergency fund, check the balance to see how much cash you have on hand for rainy days. One popular rule of thumb dictates saving at least six months’ worth of expenses for emergencies, and up to 12 months’ worth, if possible. If your savings balance is below that amount, you might go back to your budget to see where you might be able to find extra money to set aside. You can even automate your savings so that money is transferred regularly to your emergency fund account

Also, consider where you’re keeping your emergency fund. Ideally, that money should be somewhere that’s easily accessible in case a true emergency comes along. But you might also be interested in earning a good interest rate in the meantime.

For example, if you’re keeping your emergency fund in a traditional savings account at a regular bank, you might consider switching to a high-yield savings account to get a higher rate. Exploring the options at different banks and online banks may help you find one with a competitive interest rate.

Recommended: Emergency Fund Calculator

4. Review Your Debt and Check Your Credit Score

Managing debt is a critical part of your financial checkup. High-interest debt like credit card debt can make it difficult to save for the future.

Start by reviewing the debt you have. This includes a mortgage, car loans, student loans, and credit card bills. Next, calculate your debt-to-income (DTI) ratio by adding up your total monthly debt payments by your gross monthly income. According to financial professionals, your DTI should be less than 36%.

If yours is higher than that, come up with a plan to pay it off. One debt payoff strategy is the avalanche method in which you put extra money toward your debt with the highest interest rate first, while continuing to pay the minimum on all your other debts. Once that debt is paid off, you direct your extra funds toward the debt with the next-highest rate, and so on. Another approach to paying down high-interest debt is debt consolidation, which combines debts into one new loan or credit line — ideally with a lower interest rate.

This is also a good time to check your credit and credit score, which can affect everything from loan approvals to the interest rates you qualify for. Many major banks and credit card companies list your credit score on your monthly statement; you’re also entitled to free weekly credit reports from AnnualCreditReport.com.

Recommended: Tips for Maintaining a Good Credit Score

5. Reassess Your Investment and Retirement Goals

Investing can be one key to building wealth over the long-term. It’s possible to invest through a tax-advantaged plan, such as a workplace 401(k) or an individual retirement account (IRA), or through a taxable brokerage account.

As part of your financial health check, it’s helpful to know:

•   Where your money is invested (i.e., taxable vs. tax-advantaged accounts)

•   How your portfolio is diversified through different asset allocations

•   How those assets have performed over the last year

•   What you’re paying in investment fees

•   How your risk tolerance or tax situation has changed over the past year

•   How much you have in retirement savings.

Reviewing those things can give you an idea of whether you’re on the right track with your investments. For example, if you’re 30 years old and want to retire at 50 with $1 million, but you only have $10,000 in a retirement account, that’s a sign that you’ve got work to do. Using online investment calculators and retirement calculators can help you to figure out how closely you’re keeping up with your goals.

Just remember that investing involves risk. A brokerage account is not covered by the Federal Deposit Insurance Corporation (FDIC) the way bank accounts are, and it’s possible to lose the principal amount invested. It’s wise to keep risk tolerance and one’s financial goals in mind when choosing investment vehicles and assets.

Bonus Step: Factor in Life Changes and Insurance Needs

Life changes can affect your financial plans in different ways. Losing a job, for instance, can shrink your income. Getting married might increase your household income if you’re both working. Having a child, changing jobs, moving, buying a home, and starting a business are other situations that can impact your financial outlook.

If you’ve been through any of these life changes in the past year, consider what that might mean for things like budgeting, saving, and expenses. It’s also important to review your tax situation.

Getting married, for instance, means a change to your tax filing status. Having a child can open the door for added tax breaks. And starting a new business can bring additional tax obligations, such as estimated quarterly tax payments. Those are all things that could increase your tax bill year to year. It’s therefore important to consider where they fit in during your financial checkup.

The Takeaway

A financial checkup is a smart way to keep tabs on your money and your financial health. It can provide an opportunity to make course corrections and can help with overcoming personal financial challenges. If you’re struggling with credit card debt, for example, then a periodic financial checkup can help you to figure out a strategy for paying down your balances while streamlining your expenses so you’re less reliant on plastic. It can also help highlight ways you are succeeding financially and inspire you to keep going.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How often should you do a financial checkup?

Completing a financial checkup at least once a year can be a good way to see whether you’re on track with your goals and where you might be able to improve. If you’d like to check in with your money more often, you might schedule quarterly financial checkups instead.

What does financial wellness include?

Financial wellness means being able to manage your current money obligations with ease while also being able to look ahead to the future. Someone who has achieved financial wellness generally has stable income, a firm grip on their expenses, a dedicated savings habit, and little to no “bad” debt. Another component is looking forward and tracking well for future financial goals, like retirement.

What is the most important part of a financial checkup?

Analysing your budget and cash flow is one of the most important parts of a financial check up. By reviewing your monthly income vs. how much you spend each month, you can make sure you’re not spending more than you bring in. You can also identify potential expenses to trim or eliminate. This can help you free up more money to use to pay down debt and save for future financial goals.

Can a financial check up help improve my credit score?

While a financial checkup won’t directly impact your credit score, reviewing your credit score as part of the checkup process can show you where your score currently stands and the factors influencing it. Then you can take steps to build your credit if need be. Some ways to potentially do this include paying your bills on time and in full each month, and keeping your credit card balances low. Additionally, reviewing your credit report during a financial check is a way to spot any errors on your report so you can work to correct them.

What tools do I need to conduct a financial health check?

To conduct a financial health check you’ll need to gather your financial statements, such as paychecks, bank statements, bills, debts, and so on. After that, the tools you use can be as high- or low-tech as you like. You can use online calculators to add up your expenses, and also to calculate your debt-to-income ratio. You may want to use spreadsheets to track expenses as well as income or perhaps you prefer budgeting apps to track your spending in real time. Finally you can use your bank or credit card’s online portals to check your credit score, and you can get free copies of your credit reports at AnnualCreditReport.com.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/Bilgehan Tuzcu

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