Are you planning a personal finance checkup? Want to assess your current financial situation so you can see the road ahead?
It’s great that you want to improve your financial position and make some positive changes. But to do that, you’ll first need to know what your current finances look like.
Every journey begins by knowing where you are. Only then can you get directions to where you want to go.
Personal finance is no different.
The clearer the picture you have of your position, the clearer the road ahead. You’ll have a much better idea of what you need to do and, perhaps, how to do it.
That’s where a personal finance checkup comes in, which is what we’re covering today.
What is a personal finance checkup?
A personal finance checkup is a thorough assessment of your financial situation. It helps identify strengths and weaknesses in your financial situation, allowing you to make informed decisions about money.
It involves evaluating your income, expenses, debts, savings, investments, and overall financial habits to get a clear understanding of your financial well-being.
You should review all aspects of your finances to ensure you are on track to meet your financial goals and are prepared for any unexpected expenses or future needs.
What does a personal finance checkup involve?
Performing a personal finance checkup isn’t as difficult as it may sound and can provide real clarity over your current situation.
This will be essential if you foresee big changes, want to get control of your finances or are planning a big spend like a new house.
The process is very similar to setting up a household budget and will require a little time and patience but is well worth the effort!
A personal finance checkup can include:
Reviewing life
The first element of any personal finance checkup is to see where you are in life. Are you where you want to be? Are you set for the future? Do you have a pension?
Are you planning any big changes soon? Getting married? Changing career? Planning to buy a house? Are there children on the way?
Each of these can influence your current, and future, financial picture so needs to be thought about.
Gather all your financial information
Next, gather all your financial documentation. This includes pay stubs, bank statements, credit card bills, loan documents, and any other financial records you have.
Having a complete picture of your finances is essential.
This will probably mean downloading a lot of PDFs but there is method in the madness. Only by getting an accurate picture of where you are can you really perform a financial checkup.
Calculate your total debt
List all your debts on a spreadsheet or piece of paper. Include credit card debt, student loans, mortgages, car loans, personal loans, and any other outstanding debts.
Record the total amount you owe for each debt and the interest rate charged for each of them.
Determine your income
Calculate your total monthly income. Include your salary, any side gig income and any other sources of income you might have.
Understanding your total income is crucial for creating a realistic budget so accuracy is key.
If you get regular, predictable overtime or bonuses, include those. If they are more sporadic, don’t include them.
List your monthly expenses
Make a detailed list of all your regular monthly expenses. This includes rent/mortgage, utilities, groceries, transportation, insurance, entertainment, and any other regular expenses.
Be thorough and include even the smallest expense like streaming services, your regular morning coffee and everything you regularly spend money on.
There’s no need to include occasional spending like days out here as that’s not a regular monthly expense.
Differentiate between essential and non-essential expenses
Categorise your expenses into essential and non-essential.
Essential expenses are those you must pay to live, like housing, gas and electricity and groceries.
Non-essential expenses include dining out, entertainment, and discretionary spending.
This differentiation helps you identify areas where you can cut back. If you need to save money, you would begin with non-essential expenses first before moving on to essential expenses if you really had to.
Calculate your debt-to-income ratio
Your debt-to-income ratio is a significant indicator of your financial health. It’s an optional step but is important if you’re planning to borrow money anytime soon.
To calculate debt-to-income, divide your total monthly debt payments by your gross monthly income and multiply by 100.
The lower the ratio, the better, as it indicates you have more income to manage your debts.
Identify areas for savings
If you find your income is lower than your outgoings including debt payments, now is the time to take action.
Analyse your spending habits critically using the information you have gathered so far.
Look for non-essential spending where you can cut back, like dining out less, cancelling subscriptions, or finding more affordable alternatives for your regular expenses.
Everything you can save here can go towards paying off debts.
Create a realistic budget
Based on your income, expenses, and debt obligations, create a realistic budget.
Allocate a portion of your income to paying off debts while ensuring you cover essential expenses and leave room for savings.
If you get overtime or a bonus, prioritise paying off the most expensive debt unless you’re using the snowball method or have another debt payment plan.
Be honest about your financial habits
If you have debt, reflect on the habits that might have contributed to it. Then seek to change those habits.
Recognize impulsive spending patterns or financial decisions that led to your current situation.
Being honest with yourself about these habits is essential for making positive changes.
If you’re assessing joint finances, have a frank conversation about your current position, why you’re in that position and commit to making changes to improve that position.
Track your progress
Regularly review your financial situation and track your progress so you can see how things are improving.
Seeing improvements is a powerful psychological motivator and can make it just a little easier to live with those cutbacks or without your luxuries.
Update your budget as needed, especially if there are changes in your income or expenses. The clearer you can see your progress, the clearer you’ll see the road ahead.
Personal finance checkups
Personal finance checkups don’t sound the most interesting way to spend a couple of hours but they are essential.
Everyone, whatever your financial situation, whether you have debt or not, should always have an idea of your financial situation.
By assessing your finances honestly, you empower yourself with the knowledge needed to make informed decisions.
