Budgeting · August 18, 2022

What Is a Financial Checkup, and Why Do You Need It?

In the same way that getting a physical checkup once a year is an integral part of supporting good health, performing an annual financial checkup on your budget and goals will help you keep your finances in tip-top shape. This simple review can help you assess your budget, financial goals and progress—and make any adjustments necessary to stay on track or correct your course.

So what should a financial wellness checkup include, and how do you use what you learn to improve your finances? Don't worry if you've never conducted your own financial wellness exam. Here's an easy-to-digest, step-by-step approach to guide you through it.


What should a financial checkup measure?

Like a visit to your doctor to examine health-related vital signs, a financial checkup should start with an examination of your financial vital signs. Below are some of the most common components of overall financial health, which you can use to assess your progress.

  • Budget: This is the foundation of your financial plan because it tracks where your money goes. If you don't have one, you can use this household budget calculator to get a budget started.
  • Credit score: This is your ticket to major life goals, like a mortgage. The better your credit score, the lower the cost of borrowing—and the more lending options you'll have.
  • Emergency savings: Without a solid emergency fund, you may have to take on debt to meet life's unexpected expenses. A rainy day fund calculator can help you save enough.
  • Net worth: Knowing your net worth can help you assess if you're on track for important long-term financial goals like retirement, a down payment on a house or saving for your children's education.
  • Debts: The more money that goes toward debt, the less you'll have going toward important savings goals.
  • Insurance coverage: From homeowners to life insurance, it's important to have appropriate levels of coverage that protect the things and people you hold dear.

How do you know if your finances are on track?

A financial checkup is about making sure you're meeting your own personal benchmarks. That said, you can feel confident that your money is trending in a healthy direction if:

  • Your spending is generally within your budget
  • Your credit score is improving
  • You know how you'd pay for an emergency expense
  • You have a positive net worth
  • You're steadily reducing your debts
  • Your insurance limits are up to date

How do you know if adjustments are needed?

If something looks off when you review these financial vital signs, you could be right. You may need to make adjustments to your goals, budget or spending if:

  • You're carrying a lot of debt, especially credit card debt
  • Your credit score is dropping because of debt or missed payments
  • You have low or no emergency savings
  • Your rent or mortgage payment is taking up most of your money each month
  • You have goals that feel out of reach
  • You don't feel comfortable with your insurance levels or don't have some types of insurance

What healthy habits can improve your financial wellness?

Everyone must make adjustments to their financial plans from time to time. The good news is that there are simple steps you can take to improve these financial vital signs—and your overall financial health.

  • Make and stick to a budget. Think of a budget as a tool that empowers you. By knowing where your money goes each month, you can make other financial decisions with ease and find the money you need to reach your goals.
  • Build your emergency savings. Even if you start small, a bit of money from each paycheck into a savings account can prevent you from having to take on more high-interest credit card debt.
  • Look for ways to save money. Reviewing your monthly expenses for things like subscriptions you don't use or money spent on takeout food can shine a light on instant ways to save cash.
  • Pay down high-interest debt. The sooner you pay this off, the earlier you can start meeting your other financial goals. You could save even more by paying off debt early.
  • Leverage the power of technology. From bank account alerts to free online and mobile budgeting apps, these tools can help you track your finances, improve your financial literacy and build good money habits.
  • Make sure you're covered. If you're not carrying coverage for renters or life insurance, think about the cost of not having these types of coverage. Consider renters insurance to protect the contents of your apartment, especially if replacing them would mean incurring more credit card debt. You can also consider a term life insurance policy that will pay off your home for your spouse in the event of your death.

How can you extend financial wellness to your family?

When it comes to maintaining strong financial health, it's important to consider the entire family's needs. In addition to including your immediate family in your annual financial checkup, here are some steps to take to make sure your financial plan protects your family.

Review estate planning documents

If you haven't already, your annual financial review is a good time to review your estate plan. Make sure you have key estate planning documents, like a will, that provide clarity for your loved ones in the event of your death and explain how you want your assets distributed. It's also wise to discuss whether you'd like to establish trusts for your family, as well as choose a healthcare proxy and power of attorney.

You may also want to verify that your life insurance beneficiary information is up to date and evaluate whether you need to increase your coverage level. If you've had more children or another change in family circumstances, it might be time to make adjustments.

Identify your proxies

Proxies are people you choose to legally handle key decisions on your behalf when needed. For example, a healthcare proxy can make health-related decisions if you're unable to do so yourself.

It's also a good idea to have a power of attorney, or POA, in place. A POA authorizes someone to handle your finances for you, including paying your bills and managing your assets.

Before designating a proxy, make sure they understand your wishes and philosophy toward these important matters so you can trust that they'll act based on your guidance.

Consider charitable giving

If you'd like to develop a philanthropic legacy, start thinking about causes that align with your values. A financial professional can review different giving strategies and their associated tax advantages with you based on your goals. These deductions may lower your tax bracket, reduce or eliminate capital gains taxes, and help you develop a long-term donation strategy.

Think younger—and older

In addition to assigning a guardian for any minor children, review your parents' and other dependent relatives' finances. Discuss their wishes regarding nursing facilities, end-of-life care and medical treatments. Your annual financial wellness checkup may also be a good time to verify that older relatives have a will, advance medical directives and the appropriate types of POAs in place for themselves.

Checking in on your money management is an important part of keeping your finances healthy and your goals within reach. Committing to a regular financial checkup and establishing a strong savings strategy can help you feel confident about your finances and future. And you don't need to do it alone. Just as you seek a prescription from your doctor, a trusted financial advisor can help you develop a plan of action to reach your goals.

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