Financial Checkup: 5 Simple Steps to Assess the Health of Your Finances
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Whether you’re drawing up a monthly budget or using a simple tax calculator to determine how much you owe at the end of the year, financial stability starts with assessing your financial health. Below is a simple step-by-step process for how to do it:
1. Set and measure goals
Financial fitness, just like physical fitness, works better when you have an end goal in mind. Ideally, you sit down once or twice a year to measure the progress of these goals. How close did you get to attaining each one? If you fell short, where did the problem lie?
If you need to revise or set up a new fiscal goal, set aside time to do that. For some, that goal may be a healthy retirement fund. For others, a down payment or an emergency fund. Anything that involves funds you don’t already have is a worthy financial goal. Once set, break up your goal into actionable steps with quarterly or annual deadlines.
2. Draw up a budget
Budgets are essential for tracking your financial goals. If you haven’t started one yet, either grab a pen and paper or consider digital alternatives such as apps or websites. Then, begin by tracking your income and listing any regular bills—rent, utilities, insurance, and the like. After that, give estimates for groceries, entertainment, and other variable expenses. Reviewing credit card statements can help with this.
Once your budget is set up, it’s important to update and review it regularly. Ideally, your income covers regular and variable expenses, with some left over to put toward your emergency fund, down payment, or another long-term goal.
3. Review your debts
Whether it’s in the form of credit cards, student loans, or mortgages, most people have some kind of debt. Getting a clear picture of how much you owe and determining how you can pay it off is essential to any financial health assessment.
Start by looking at how much progress you’ve made in paying down debt. If debts keep rising, you may need to cut down spending, refinance a loan, or switch to a credit card with a lower rate. Then, consider using the snowball method of debt reduction, paying off the smallest debt first and working up from there.
4. Check your credit score
Your credit score is a measure of your creditworthiness that lenders consider before giving you a loan. The most widely used scoring system is FICO, which ranges from 300 to 850. Generally, the higher your score, the easier it is to qualify for a loan. If your bank or credit card company doesn’t offer a free one, you can find one from credit reporting agencies for a small fee.
If your credit score is lower than you’d hoped, there are quite a few strategies for raising it to where you’d like it to be.
5. Plan for taxes
To optimize your deductions and avoid any unwelcome surprises, it helps to keep on top of taxes. For the self-employed, this is particularly true because a failure to pay quarterly estimated taxes can result in a penalty at the end of the year. In addition, tracking tax-deductible expenses can make things easier when it comes time to file returns. Furthermore, tracking can help determine if it’s better to pay for big expenses now or postpone them for next year.
Just like annual visits to the doctor, annual reviews of your finances help ensure you’re on the right track for reaching long-term financial goals. So, implement the steps above, and take a more proactive approach to your financial fitness this year.
