How to Perform a Financial Health CheckMost of us go to the doctor at least once a year to have our health checked, and we also go to the dentist once or twice a year to make sure our teeth are healthy and white. While we are at the doctor’s or dentist’s office, in addition to getting an idea of our current health, we also usually receive an overview of any preventive measures we can take to make sure we either get healthier or stay healthy, depending on which is most appropriate. These are both excellent practices, since getting a health check-up helps us discover potential health problems or to make sure we know and understand any potential health problems that may be coming in the near future.
Why Do We Need a Financial Health Check?Since our financial health is almost as important as our physical health, it makes no sense to ignore that aspect of our lives. When we do this check, it allows us to assess the current state of our finance and enables us to determine the likelihood of meeting our financial goals. Conducting a review of our finances at regular intervals (such as annually, semiannually or quarterly) allows us to know where we are, compare our financial plans and find out where we’re going.
Practical Insights For A Good Financial CheckSo, what does a good financial health check entail, exactly? Here is what you should determine every year, so that you get an accurate picture of where you are, as compared to where you were during your last check-up.
Are You Financially Solvent?Your first main goal should be to make sure your finances are in ‘the black’, which means knowing how much disposable income you have, or should have. That is the first place you should look in evaluating your financial health. That means you take in more money than you are paying out. If your career is going well, you should be improving every year because you should be getting a raise every year. You may also be getting bigger bonuses and other incentives, and that’s good unless you still have money left over after you count your income and deduct all of your expenses. That last part is the hard one since not everyone keeps track of everything they spend. That is a habit that needs to be changed.
For one month, keep track of every penny of spending, and you will probably be shocked at how much it adds up to, and how much is not necessary.
What Is Your NET Worth?This is why you should keep track of your spending and calculate your net worth. When you have an accurate accounting of your income and your expenditures, you can then use that information to determine your net worth, which is the value of your assets, such as bank accounts, investment accounts, property, minus your liabilities, which refers to any kind of debt, including your mortgage, car payment, personal loans and credit cards.
Keep in mind that your income is not part of this calculation. It’s also possible to have a negative net worth if youâ€™re young. It can be quite stimulating to watch your wealth grow over the years, as you spend less and change your bad habits.
Improve Both Disposable Income and Your NET WorthOnce you know both your disposable income and your net worth, then it is time to evaluate your current status and determine whether you can improve one or both of them. When it comes to your assets VS your liabilities, think about how you can increase your income and eliminate your liabilities. Adjusting your budget can help you put more money into your debts and pay them off more quickly. Also, by managing your debts correctly, you can make investments that could have a positive effect on your assets.
You could also consolidate your debt and transfer it to a financial instrument, like a consolidation loan, that could reduce your interest rate, as a way to help you pay down debts faster.
Create or Revise Your Monthly BudgetIf you’re not financially profitable monthly, you have to look closely at your spending and create a budget based on what you need and don’t need. If youâ€™re spending $50 per week on coffee, for example, ask yourself if you can get along with less coffee. Even if you are still spending less than you make, this is a good opportunity to see if you can put more of your money into savings, which would then improve your net worth, which is everyone’s goal.
We strive to provide accurate information regarding personal finance and debt management, but it may not apply to an individualâ€™s situation directly. This content is for informational purposes only and should not be considered as financial advice. PayDayAllDay.com wonâ€™t bear any responsibility in relation to personal decisions made based on it. You should consult your financial or tax advisor before making any financial decisions.
References and Sources1. Net Worth Calculator. Kiplinger.com Available at https://www.kiplinger.com/investing/wealth-management/603443/net-worth-calculator 2. How to Self-Diagnose Your Financial Health. NewYork Times. Available at https://www.nytimes.com/2010/03/25/your-money/financial-planners/25CHECK.html 3. Assets vs. Liabilities & Revenue vs. Expenses. Smallbusiness.chron.com Available at https://smallbusiness.chron.com/assets-vs-liabilities-revenue-vs-expenses-52855.html 4. I Need To Get My Finances Together. Forbes.com Available at https://www.forbes.com/sites/shelcyvjoseph/2017/10/23/i-need-to-get-my-finances-together-where-do-i-start/#16e8a326078a