Well, another year is about over (and I’m not even going to go into talking about what a year it has been!). If you only evaluate your financial health once a year, this may be a good time to do it. You should be doing this at least once a year. You go for your regular doctor check-ups, right? Dentist visits, yes? Your financial health needs check-ups as well. Catching any gaps can save you time, money, and frustration.
Steps To Take
Calculate your net worth
This is an overall financial snapshot. Again, you should aim to do this at least once a year. There are simple free spreadsheet you can google online. If you would like an in-depth one, you can purchase it here for just a few dollars. At a basic level, your spreadsheet should have – at a minimum – your assets and liabilities calculated. The difference between the two is your net worth. Is your number negative? This is not necessarily something to worry about. Many young people have a negative net worth. The point is to improve year after year and build wealth year after year. Don’t compare yourself with anyone else. Just compare your present self with your past self.
Debt-to-income ratio
Again, this is financial snapshot. The point is to be improving year after year. You can calculate this percentage by dividing your gross monthly income to your debts. For example, let’s say your debts (mortgage, credit cards, car payments, loans, etc) total $3,500 per month. Your income totals $9,000. Dividing $3,500 by $9,000 would give you a debt-to-income ratio of 39%. Your goal is to get this percentage as low as it can go (no debt at all?). By the way, if your percentage is in this 40% range, or more, it’s getting too high.
Goal Setting
Write down your goals. You should have both short-term goals and long-term goals. Write down your goals for this next year. Where do you want to be this time next year? Take those goals and break them down into manageable bite-size pieces. You want $5,000 in your savings account? Set up an automatic transfer of $100 every week going into your savings account.
Do you have a budget?
If you find yourself wondering where your money went, you need a budget. If you find there is more month than money, you need a budget. Get the picture? I always start with bank statements. How have you been spending? Print up the last one to two months of bank statements and start categorizing. How much money did you spend on groceries? Eating out? Entertainment? Salon visits? From there, you can create a realistic budget. What brings you joy? What categories can do cut back on or do without altogether? If you want help with taking back control of your finances, schedule your free consultation with us. We can help you create a realistic budget that works with your life. Here is a budget spreadsheet that can help. It even comes with an analysis page so you can see everything on one dashboard!
Emergency fund
This past year, too many people learned the hard way the importance of a funded savings account and/or emergency fund. Furthermore, for too many people, the usual “3-6 months of expenses saved up” didn’t cut it – they needed more. Building this account should be a top priority. Set up an automatic payment to your savings account. You can do it monthly, weekly, or set it up to coincide with your pay dates. This takes only a minute to do online with your financial institution. Another option is to set up an allotment with your employer. This way, you never even see the money hit your checking account. Out of sight, out of mind. Check with your employer to see if this is a possibility.
Credit check
I hope you are looking at your credit report at least once a year. Bare minimum! Check for errors so you can correct them as soon as possible. Also check and track your credit score regularly. Focus on improving any items on your credit report and your credit score will follow suit. Read here for more information on what goes into your credit score.
Retirement roadmap
How is your retirement fund looking? Are you on track to be where you need to be? How are you invested and does that align with your goals? If you feel comfortable doing this yourself, have at it! If you do not, find a reputable, honest financial advisor to help you with this process. There are many factors to consider (such as pensions, annuities, real estate, dividends you are/will be receiving, or other investments you may have), and a financial advisor can help you sort through all the noise and keep you focused.
Got kids?
If so, and you have set up your own financial situation, consider opening an education account for them. You can automate the payments to that as well. Even get grandparents and other family members in on the action. Two main accounts are 529s and a Coverdell account. Did you know you can open a 529 for any state? It doesn’t have to be the state you live in. Many states offer some kind of tax break as well! Check out this website on sec.gov for more information on 529s.
Insurance Needs
Have you covered your bases when it comes to insurance? Do you need life insurance? For example, do you have a spouse, kids, or other dependent that depends on your income? Have you thought about long-term care? When was the last time you evaluated your home and auto insurance? Now is a good time to over your policies and if there are any gaps that need to be filled. You don’t need to go all overboard or anything, but you do want to make sure you are covered and insured should the unexpected happen.
Final Thoughts
Evaluating your financial health is just as important as evaluating your physical and mental health. At a minimum, you should be doing this once a year. Now that it’s the end of the year, what better time to do it? What better time to start? Get your snapshot now, do it every year, and hopefully you will see improvement year after year.
If you need help in taking back control over your money, check us out at Ford Financial Management. See if we are a good fit for you.
