Just as regular doctor’s visits are important for maintaining your health, personal financial check-ups are key to remaining financially afloat. But what do they entail, and what should you do if you come back with anything but a clean bill of health? Here’s what to know about performing financial check-ups and how they can help you make informed decisions about your finances.

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What Are Financial Check-Ups?

A financial check-up is a process that assesses your financial health. It involves examining your current income, debt, and much more. Experts recommend performing check-ups on a yearly basis or after major life events like marriage. If your finances are relatively straightforward, you can perform these check-ups on your own. However, individuals with more complex financial situations may consider speaking to a financial advisor for guidance.

A Step-by-Step Guide to Performing a Financial Check-Up

Financial check-ups may look a bit different for everyone, as all of our financial situations are unique. However, there are a few key steps and best practices to follow to ensure a smooth and effective process.

Understand Your Income and Expenses

First, take a look at your income and regular expenses. This foundational step is essential in identifying areas of strength and opportunities for improvement. Start by documenting all sources of income and listing your monthly expenses. Categorize your expenses into fixed and variable to gain a clear picture of your spending habits.

Fixed expenses are costs that remain consistent each month, such as rent and insurance premiums. They don’t fluctuate with changes in activity level or usage. Variable expenses, by contrast, change depending on lifestyle. For example, your utility bills might be higher in the winter, or you may pay more for gas during high-travel periods.

Consider Your Debt

Debt management is one of those things people tend to push to the side, but by staying on top of your debt payments you can save money and dig yourself out of the hole quicker. A financial check-up is the perfect time to consider your debt and how to repay it. 

Two of the most efficient methods for paying down debt are the avalanche and snowball methods. With the debt avalanche method, you prioritize making minimum payments on your outstanding accounts and using whatever is left over to pay the bill with the highest interest rate. The snowball method suggests paying off your smallest debts first and gradually working your way up to the big ones.

Evaluate Your Savings and Investments

Your savings and investments are your financial safety nets. Assessing their status can help ensure you’re on track to meet your financial goals. First, make sure to build an emergency fund if you haven’t already. General advice is to save three to six months’ worth of living expenses. Review your savings and identify areas where you can cut back to build or replenish this fund.

Your investment portfolio should align with your financial goals and risk tolerance. Regularly reviewing your investments can ensure they are performing as expected. Consider consulting with a financial advisor to make informed decisions about asset allocation and diversification.

Look at Your Credit Health

Your credit score can provide valuable insight into your financial fitness. It impacts everything from your ability to secure loans to your job opportunities. Begin by reviewing your credit report from all three major credit bureaus (Experian, Equifax, and TransUnion) through a free annual credit report check. 

Analyzing the details of your report also helps you understand where your credit issues lie, whether you struggle with high credit utilization, a lack of credit history, or missed payments. Aim for a credit score of 700 or higher, as this will generally allow for more favorable credit terms.

Revisit Your Retirement Plan

It’s never a bad idea to evaluate your retirement plan when conducting a financial check-up. Even if you think you’re good to go, it pays to consider where you started and where you currently stand. Are you still on track to retiring at your desired age? Where do you still need to save?

A common benchmark is to contribute at least 15% of your gross income toward retirement savings. See if you’re maximizing employer contributions, as this is effectively “free money” that can significantly boost your retirement savings. To determine whether or not you’re on track, use a retirement calculator to estimate how much you’ll need to retire comfortably, accounting for inflation and potential medical expenses.

Make the Most of Your Next Financial Check-Up

The whole point of a financial check-up is to see where you are and determine if you’re on track to meeting your money goals. Don’t be afraid to switch things up if something isn’t working, and consider speaking to a financial advisor. They can help you perform a comprehensive check-up and fill in any gaps in your plan, putting you on the path to financial success.

 

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