Whether you think you’re doing well or know you need help, it’s a good idea to assess your financial fitness at least once every year. By understanding your weaknesses, you can focus your efforts on improving your finances where you need it most.
Here are three steps you can take to assess your financial preparedness and create an improvement plan that will help you get ahead.
Step 1: Take Your Financial Temperature
You don’t have to be an expert to begin to analyze your financial health. To get a general idea of your status:
- Total your assets, such as bank account balances, retirement savings, real and personal property, and investments.
- Subtract your liabilities, including credit card balances, student loan debt, car loans, mortgages, and any other loans that may affect your interest in real or personal property.
- The result is your net worth. A high, positive number generally indicates financial health, whereas a negative number generally indicates that there could be a problem.
However, raw numbers don’t always tell the full story. For instance, you could own a lot of real property outright and have no liabilities but have few liquid/cash assets, which could cause money management problems if you need cash quickly. Determine how long you could probably continue to pay your bills if you lost your income by calculating your monthly living expenditures ratio:
- Add up all your annual expenses, and divide that number by 12 to determine your average monthly expenses.
- Add up your accessible cash and savings (e.g., money that you can access within a short period of time such as a couple of days or a week), and divide the result by your monthly expense amount.
- Ideally, you want the result to fall between at least 3.0 and 6.0, meaning you could cover three to six months of living expenses if you lost your income. The higher the number, the more prepared you are to manage unexpected expenses or loss of income.
Leverage our financial planning checklist for other simple equations to help gauge your financial health.
Step 2: Set Your Financial Target
Everyone’s financial goals are different. They range from paying off student loans to buying a new car or home to saving for retirement. To set your financial goals:
- Think about where you want to be in five years and what you will need to achieve financially in order to get there.
- Write down those goals, along with a target date for achieving them.
- Break your goals into itemized tasks that you can do on a weekly or monthly basis so that you know exactly what it will take to reach your goal.
- Track and celebrate milestones along the way.
Once you’ve established your goals, you may need to prioritize them in order of necessity. For instance, if your emergency savings aren’t what you want them to be, you may decide that’s your top priority. Once you’re on target, you might start working toward your next important goal. To ensure that everyone is on the same page, you may want to discuss these priorities with your partner or family.
Step 3: Gauge Your Financial Fitness Progress
A key aspect of financial fitness is being able to stick to a budget and reach your financial goals. To assess your money management skills, monitor your monthly spending to see how closely it aligns with your monthly expenses. If you find you’re spending more than you need to, identify what you’re buying and think of ways to avoid making unnecessary purchases. For instance, if you’re spending too much on weekday lunches, fit pre-making meals into your schedule.
Also track your progress against your weekly and monthly milestones, as well as your projected end dates. If you frequently miss savings targets, determine where extra money you believe you should have at the end of each month is going. If unplanned expenses are eating up your disposable income, make sure future surprise costs are necessary ones, such as fixing the car or repairing a busted pipe. If these expenses continue to cause problems, look for ways to cut back on other expenses.
This type of proactive budget planning can help you strengthen your personal finances and make progress toward your savings goals. To build your budget and follow your cash flow online with your finances in one place, including accounts at other institutions, check out My GreenInsights.
