Reviewing your financial health is the first of many steps on your journey to financial success. While it might seem straightforward, one cannot underestimate its importance. This step will highlight areas of concern, areas of strength, and lay the basic foundation for the steps ahead.
Though it sounds simple, this process can be incredibly difficult because it requires vulnerability with yourself and possibly a partner and a willingness to critically assess your financial health. You may need to seek professional help. This is not a time to be defensive but rather to reflect, admit past mistakes, identify areas for improvement, and plan actionable steps moving forward.
Here is a step-by-step guide to assessing your finances:
Reviewing Income and expenses:
You’ll see “income” and “expenses” mentioned a lot on this blog. At this stage, I’m less focused on budgeting (we’ll cover that in the budgeting stage) and more concerned with truly understanding what your income is and what your typical expenses look like.
For income, log your monthly take-home salary, dividends, rental income, etc. Next, review your expenses and break them into various categories. This can reveal areas of excess spending. Then analyze whether your income exceeds your expenses (hopefully it does!), or vice versa. This analysis will help determine how you need to budget going forward.
Savings and Emergency Fund Review:
List all your savings accounts, their balances, and interest rates. Then analyze why you have these funds. Are they emergency funds meant to cover unexpected expenses? Or are they savings for that amazing trip to a tropical island? While I love a good island getaway, hopefully, you have a solid emergency fund in place and maintain it consistently.
Debt Review:
In this step, focus solely on listing and reviewing all your debts. We’re not discussing repayment strategies yet that’s coming later. List every debt you have along with the balance, payment terms, interest rate, length of repayment, and the associated asset’s value (if any).
Reviewing the asset’s value helps determine if selling it could pay off the debt entirely more on that in a future post about debt repayment strategies.
Investment and Retirement planning:
This step goes beyond simply reviewing account balances. Take a deeper dive into the investments you currently hold: review key terms of your investments and retirement plans, take stock of your winners and losers, and analyze what has worked or not worked for you and why.
Here are some questions to guide you:
- What investment/retirement accounts do I have?
- Individual brokerage account?
- 401(k)? Does my employer offer a match?
- Pension? What are the contribution rates and retirement payment terms?
- Roth IRA
- Traditional IRA
- Other accounts?
- What investments and amounts do I hold across these accounts?
- What has my investing strategy been in the past?
- Are there any winners or losers in my portfolio?
- Are there restrictions on accessing these funds?
- What is the “magic number” for retirement how much do I need to live comfortably?
Net Worth
The final step is calculating your net worth, which summarizes your financial position. Add up all your assets (savings, investments, property, etc.) and subtract your liabilities (debts, loans, etc.). This gives you a snapshot of your financial well-being at this moment.
While calculating net worth is a useful exercise, I don’t believe it’s the most important number it’s just a figure on paper. However, it can help keep you motivated if you see that number grow over time. Though net worth itself isn’t the most critical step, the other steps must be completed to make meaningful progress toward financial freedom.
Conclusion
Assessing your finances is a crucial part of your financial planning journey. It provides essential insight into your current position, highlighting both your strengths and weaknesses. From here, you can begin to formulate a plan that will help you achieve your financial goals.