6 tips for conducting a financial health checkup
Have you had a financial checkup lately?
When considering your health, most people think of the traditional areas – physical, mental and overall well-being. However, one area that should also be included is your financial health. In order to assess your financial health, follow these six easy steps to complete a personal financial health checkup. You can get started on your own, but just like a physical health checkup, you’ll want to get a professional’s insight too.
1. Check Your Credit Report. There are three main credit reporting agencies that hold your credit history: TransUnion, Experian and Equifax. Federal law entitles you to a free report annually from each agency and you can obtain your reports, which does not impact your rating, by visiting www.annualcreditreport.com. Read each report and identify any information that doesn’t seem accurate. Clean up your report by closing accounts you no longer intend to use which may help improve your credit profile. If you are married, both spouses should review their respective reports. Check joint accounts for consistency between the two of you. You can report any inconsistencies or errors on your reports to the credit agencies directly.
2. Take a Financial Inventory. What do you own and where is it located? How is it titled? From stocks and bond accounts to homes and vehicles, make a list of every asset. Once you have your list, spend time reviewing the items, and consider consolidating investments and other accounts if they are scattered around to multiple institutions (seek out your advisor before consolidating assets to consider any possible tax implications). Having fewer account statements to review will simplify your financial life and lay the foundation for you and your advisor to implement a unified strategy. Don’t forget to tally up your debts too! The review of your credit report should aid you in this part of the financial inventory task. Once you have a pulse on both your assets and debts, you’ll be able to determine your overall net worth.
3. Review Your Account Transactions. This one seems obvious, right? You probably review your account transactions, or at least eyeball them, when you have the time. To genuinely understand your inflows and outflows of money though, it’s helpful to categorize them into three buckets:
a. Income – wages, investment income, etc.
b. Expenses – necessary items like utilities, real estate taxes, groceries, etc.
c. Luxury items – restaurant tabs, travel for pleasure, special clothing items, entertainment, etc.
Of course you can’t just look at your online banking account or checkbook. It’s also important to include other payment methods, such as credit cards, in this aggregated review too. Some credit card companies provide a year-end statement that summarizes annual purchases by category for you, coming in very handy for this task. Reviewing your last filed tax return is a good starting place for characterizing sources of income as well.
4. Look Forward and Be Prepared. Do you have any large upcoming expenditures? If yes, have you quantified them and identified a source of income or assets to cover those costs? If you have a savings plan in place or a source of funds in mind, make sure you are still on track to reach the goal on time. If you don’t have a plan, begin developing one and discuss it with your financial advisor. Your advisor will be able to help map out a plan to reach your goal. If you don’t have any known future lump sum expenditures, have you made provisions for unexpected costs? A general rule of thumb is to reserve six months of expenses in cash or a readily liquid account to cover emergency costs, such as medical bills or loss of a job. Depending on the results of your financial inventory, you may desire to reserve more than six months or less than six months. Your financial advisor can help you with this consideration.
5. Prepare for Retirement. Not planning to work forever? Or know that your current sources of income will decline over time? The task of assessing whether you are financially fit for retirement may take a bit more effort on your part. Lean on the skills of your professional advisors to guide you through this analysis. The four tasks you completed above lay the groundwork for your dialogue around retirement readiness. Nearing retirement? It’s not too late to talk about how your assets will work for you or adjustments you may desire to make in lifestyle or expenses so that they will.
6. Review Your Will. Now that you’ve organized your financial situation, who will you trust to step into your shoes and manage it, if you are no longer able? And who will transition your assets (and pay your debts) when you pass away? Dust off your estate plan to see if you have everything covered. After initially setting up your plan, you probably (like most people), haven’t thought much about it since. These documents are critical should something happen to you. Most estate plans generally have either three or four core documents: a power of attorney for property, a power of attorney for healthcare, a will and (sometimes) a revocable trust. If you haven’t developed an estate plan yet, reach out to your current advisor to get information on attorneys practicing in this area.
It’s important to spend quality time on each financial check-up step so you don’t overlook anything. Tackle them one at a time, at your own pace. The key is to complete them all. Once you have gone through your first full financial health check-up, future check-ups will be a breeze. After finishing these tasks, you’ll be more organized and have a plan to achieve personal financial health.