A personal financial health assessment is more that a good idea. It can be the key to maintaining your sanity as you work to build your financial future. You need to assess your position regarding income and expenses, cash available, outstanding debt, insurance, and retirement preparation. This is not a quick process if it is your first time. Two large general steps are needed: organize your records and create financial data sheets to profile your current financial health. The final step is to review your financial health.
Organize your Financial Records
Get all of your recent financial records together.
Open drawers, rummage through the cabinets, and check all of the nooks and crannies. You will need your most recent bank statements, retirement account reports, credit statements, and the approximate equity in any large possessions like your car, boat, and house. This is one of those times when it better to get something that you do not need rather than leave out an important piece.
Make sure that all balances are up-to-date and reconciled.
Unreconciled and old statements are of little value. You have to reconcile current statements for banking and credit accounts to be sure of what you have and what you owe. This may take a little extra time, but an accurate outcome is worth the effort.
Create a list of your fixed assets and their current respective values.
Unlike when you make applications for credit and other reasons, there is no real incentive to hide assets or overvalue them. You need this list to be as accurate as possible. It may require you to call your lenders to get precise balances on mortgages and other secured loans. Although all of these amounts will vary over time, this assessment is a snapshot of your financial health today.
Gather up all insurance policies.
Insurance does not directly add to your net worth unless you have some type of cash value life insurance. However, part of your financial health relates to how well your assets are protected from loss. Insurance is how most of your assets including your life is protected from financial loss.
Divide your information into four stacks.
Put all of the documents that pertain to your monthly income and expenses in the first stack. The next stack will contain your debt and asset balances. A third stack will have all of your information about your retirement assets. Make the final stack from your insurance documents.
Create Financial Data Sheets
Write your sources of monthly income on the first sheet.
In the first column on this sheet, list each source of income. Record the amount of income from each source in the next column. Total this column to arrive at your total expected monthly income.
List your monthly expenses just below the total line of your monthly income.
Follow the same pattern for each of your expenses. Compute a monthly amount for expenses like food, transportation and clothing. Insert these amounts opposite their respective descriptions in column two. Add up the expenses to compute your monthly total expenses.
Subtract total monthly expenses from total monthly income.
Net income is the amount of money that you have when expenses are subtracted from income for the month. Compute your net income by subtracting the total monthly expenses from the total monthly income. A sure sign potential financial trouble is a negative number in this total.
On the second sheet, record your assets.
List the assets in one column and in the next column record their approximate market value. The third column will be any debt against the asset. Subtract column three from column two and record the difference in column four. Some of these numbers may be negatives. Total up column four. Below the total of your assets, list your unsecured debts and record the debt amounts in column four. Add up your debts and subtract them from your net asset total to arrive at your preliminary net worth.
On the third sheet, list all of your retirement savings amounts.
List each account that you have used to accumulate retirement savings. These will include 401(k), IRA, Roth IRA, 403(b), company retirement accounts, annuities, and any other assets being reserved for your retirement years that have not been listed on previous forms. Add up the amounts to see how your retirement savings is matching your anticipated needs.
On the fourth sheet, record your insurance polices with company name and amounts.
Record the company names, policy numbers, type of insurance and coverages. Group life insurance separately and note any cash value that may have accumulated.
Evaluate the reports to determine your financial health.
Net income needs to be positive.
These reports parallel the big issues that confront most people in their financial struggles. You must have more income that expenses each month. If this is not true, you have to find a way to gain income, reduce expenses, or do both as soon as possible. You should try to have a net income that is a positive amount of 10% or more of your after tax income.
Your net worth should be positive, also.
People under 50 can live with this amount being negative if most of the negative amount is their home mortgage. If most of your negative net worth is unsecured debt, this could be a problem. A small negative amount is not an issue unless your home is paid off, and its value is swamped by unsecured debt. Work to increase savings and decrease unsecured debt as rapidly as it can be done. Focus on reducing debt more than increasing savings until the debt is eliminated.
Look hard at your retirement accounts.
If you consider your working life to be about 40 years, you can think about your retirement incrementally. While this oversimplified, look at each 10 years as 25% of your retirement. If you have passed 10 years of work, you need 25% of your desired retirement savings in the bank. At 30 years, you should be 75% of the way toward banking your retirement funds. This easy method will help you to see if you are on track.
Be practical in reviewing your rate of retirement savings.
Keep in mind that generally earnings are higher near the end of your working life than at the beginning. You should be able to accellerate savings rates after your family is raised and your home is paid for. If you find your retirement savings is on track or ahead of schedule, you can relax a little and just keep the program moving forward.
Review your insurance carefully.
Homeowners insurance and car insurance need to be structured not only to cover you from property loss, but need to have sufficient liability coverages to protect your assets. You need enough liability insurance to make sure that a lawsuit does not reduce your net worth.
Do you have enough life insurance to make a financial safety net for your family?
Life insurance should be viewed as a financial protection for dependents against the loss of your income due to death. The amount should be enough to replace several years of income to give your family time continue their lifestyle while finding a way to replace your income or eliminate debt and expenses.
Other factors you should consider.
Do you have enough money in an emergency fund?
Emergency funds are to cover your needs in case of a large loss or a loss of income. Having a fund with at least six months of income is sufficient for most people. This will give you the opportunity to find a new job or enough money to cover a large unexpected loss. An emergency plan that includes huge debt increases is a sign of financial weakness.
Look at these personal issues.
How secure is your job? Do you have a long time in with a stable company? Your job security is a major part of your financial health because it represents stability in your income. Take an honest look at your personal integrity. Honesty and reliability in financial dealings are critical to maintaining a great credit history and score.
Request copies of your credit report from time to time.
This will help you make sure that your credit history is not blemished and credit scores are not too weak. While you do not want unnecessary debt, you do not want to be ineligable to get credit either.
Make sure that family members are not a drain on your finances.
Your financial health depends on being able to control expenses and debt. If you and your spouse cannot agree on a spending plan or how to maintain your income, this will have a direct negative affect on your financial health. The reverse is also true. A good working family budget will go along way toward helping this situation.