How To Conduct a Financial Checkup

Here’s a simple system for assessing your fiscal fitness

Fact checked by Yarilet Perez
Reviewed by Andy Smith

Many experts suggest that people make a point of conducting a personal financial checkup on an annual basis or after a major life event (such as a marriage, divorce, birth, or death). The question is, what does that involve? What should you do?

To ensure you don’t miss something critical to your financial well-being, we’ve put together this checklist of the main topics to cover.

Key Takeaways

• A financial checkup is a systematic look at the complete state of your finances.
• It can be useful to perform a financial checkup annually and after any major life event, such as a marriage, divorce, birth, or death.
• Your checkup should include your retirement accounts and other savings, your debts, your estate plan, and your insurance coverage, among other topics.

1. Life Changes Review

To begin with, review any major changes in your life that have taken place since your last financial checkup. Here’s the checklist:

• Job changes or income adjustments
• Marriage/divorce
• New family members
• Relocations
• Major purchases (home, car)
• Inheritances or windfalls
• Health changes

Each of these life events can alter your overall financial picture. As you go through the sections below, consider how any recent life changes could affect your plans moving forward.

2. Review and Assess Your Financial Goals

You’ll want to evaluate your progress toward your financial goals and adjust as needed. Once you achieve a goal, cross it off the list and replace it with another.

Building an adequate retirement fund is one example of a financial goal. Others include creating an emergency fund, saving up for a down payment on a car or home, starting your own business, or anything else that requires money you don’t already have or can’t afford to spend. Each year, you’ll want to check the following:

• Review last year’s financial goals
• Mark completed goals
• Set new goals for the coming year:

1. Short-term (one year or less)
2. Medium-term (one to five years)
3. Long-term (five or more years)

Ensure your goals are specific, measurable, achievable, relevant, and time-bound (memorable by the acronym SMART).

3. Review Your Budget

Your budget is a blueprint for handling your income and expenses that you monitor and adjust as needed. Here’s what you’ll need to do:

• Calculate total monthly income
• List and categorize all expenses
• Compare actual spending with what you originally budgeted
• Identify areas for improvement
• Update budget categories and amounts
• Set savings targets

The idea is to ensure you have enough income to cover all your usual expenses, with some extra set aside for your longer-term financial goals. You can maintain your budget with pencil and paper, a computer spreadsheet, or one of the many available free or inexpensive budgeting software programs.

4. Review Your Debt

Review your progress in paying down all debt, including loans and credit cards. If your debt is increasing—especially in the form of high-interest credit cards—it might be time to adjust your spending so those balances start to fall again. Here’s what to check:

• List all current balances
• List all interest rates
• List your monthly payments
• List your payoff timelines
• Check for refinancing opportunities
• Review your debt reduction strategy (snowball/avalanche method)
• Calculate your debt-to-income ratio

Snowball vs. Avalanche Methods

Two popular ways to cut down on debt are the snowball method and the avalanche method. The snowball method focuses on building psychological momentum by targeting the smallest debt balance first, regardless of the interest rate. Once the smallest debt is paid off, the payment amount is “snowballed” into the payment of the next smallest debt, and so on.

Meanwhile, the debt avalanche method focuses on minimizing the total interest paid by tackling the debt with the highest interest rate first, no matter the balance. While mathematically better at actually lowering your bills over the long term, the avalanche method may take longer to see initial progress, which can be demotivating for some. The best method depends on your personality and financial situation, with the snowball offering quick wins to fuel motivation and the avalanche offering the most cost-effective approach in the long term.

Important

Federal law entitles you to one free credit report annually from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. Checking these periodically is an important way to ensure you’re on top of your revolving accounts and spot anything that doesn’t belong on your credit report.

5. Check Your Credit Reports

Each of the three main credit reporting agencies (Equifax, Experian, and TransUnion) are required by federal law to provide you with a free copy of your credit report each year. You can get your reports at the official website for that purpose, AnnualCreditReport.com. Once you have the reports in hand, you’ll want to check for errors or fraudulent activity. If you receive a credit score and aren’t happy with it, look at ways to improve it.

6. Check on Your Retirement Savings

As part of your financial checkup, you’ll also want to evaluate your contributions to your company 401(k) plan, if you have one. Make sure you are contributing enough that you take full advantage of any employer match.

“In a perfect world, you put the maximum amount in” your 401(k), “but at a minimum, you should contribute up to the point where your company matches what you put in,” Peter Lazaroff, a financial advisor and chief investment officer at Plancorp, told Investopedia.

“Meeting the match doesn’t necessarily mean you have to sacrifice other financial goals, such as paying down debt or establishing an emergency fund,” he said. “You can still chip away at debt and put away small amounts in an emergency fund if necessary. But securing that employer match is crucial.”

If you’ve already maxed out your 401(k) contributions, consider opening a traditional or Roth IRA. This could also be a good time to rebalance your portfolio as needed. In general, the closer you are to retirement, the less risk you should be taking with your money. Many 401(k) plans offer target-date funds that automatically adjust your risk exposure over time. Here’s your checklist:

• Review retirement account balances
• Check contribution levels:

1. 401(k)/403(b)
2. IRA/Roth IRA
3. Other retirement accounts

• Make sure you’re receiving the full employer match if you can
• Review whether your investment allocations fit your goals and risk tolerance
• Rebalance your portfolio if needed

10% to 20%

The amount of your pretax income that many experts suggest should be earmarked for retirement savings.

7. Consider Your Other Savings Goals

Assess your progress toward any other savings goals, such as an emergency fund, a college savings fund (such as a 529 plan), a new-car fund, or a vacation fund. If you had to dip into your emergency fund for home or car repairs recently, aim to replace that money as quickly as possible. Here’s your checklist:

• Check your emergency fund balance (three-to-six months of expenses)
• Review progress on specific savings goals:

1. Home down payment
2. College funds
3. Replacing your vehicle replacement
4. Travel/vacations

• Compare interest rates across accounts
• Look for better savings account options

8. Make Sure You’re Properly Insured

Your insurance needs can change over time. You’ll want to make sure you have an appropriate amount of life insurance, disability insurance (for income protection), and homeowners or renter’s insurance, including flood insurance, if needed for where you live.

Reevaluate your health insurance needs, including long-term care (LTC) insurance. Consider switching insurance companies or raising deductibles on home and auto policies to lower premiums. You can also save money by bundling multiple policies with one company. Here’s your checklist:

• Life insurance

1. Coverage amount
2. Beneficiary designations
3. Premium rates

• Health insurance

1. Is your coverage enough?
2. Premium costs
3. Health savings and flexible spending account

• Disability insurance
• Property insurance

1. Home/renters
2. Auto
3. Umbrella policy

• Long-term care insurance needs

9. Evaluate Your Estate Plan

Even if your assets are relatively modest, you should have a plan for what would happen to them if you were to die. Review your will or trust to ensure you’re happy with your choice of executor, trustee, and anyone you’ve granted power of attorney.

Review beneficiaries and how much each would receive so they match your current wishes. Assess your living will or other advance directives. If necessary, engage an estate planning attorney to ensure you’ve followed all state and federal laws that apply. Here’s your checklist:

• Review/update will
• Check the beneficiary designations on all accounts
• Review/update:

1. Power of attorney
2. Healthcare directives
3. Trust documents

• Update your inventory of assets
• Review the estate tax changes for any adjustments you make

10. And Don’t Forget To Review Your Taxes

The IRS has an online tax withholding estimator you can use to ensure you’re having the right amount withheld from your paycheck. If you are self-employed (even part-time) or receive other income that doesn’t have taxes withheld, such as a pension, you’ll want to be sure you’re making adequate quarterly estimated tax payments. This will keep you from facing a big bill—and possible underpayment penalties—when you file your tax return for the year.

Extra Benefits of a Tax Review

David Flores Wilson, a certified financial planner at Sincerus Advisory in New York City, told us that reviewing your taxes is also a time clients can catch things they missed in other parts of their financial review. “Our tax return review checklist often reveals missing accounts and commonly missed state deductions like 529 contributions and investment advisory fees in New York,” he said. “Recently, a review of one client’s tax return made us aware of an unknown brokerage account incorrectly titled, which would put this elderly couple in a probate situation were they to pass away before they had a chance to update the title.”

Besides a financial advisor, you might also want to schedule a meeting with a tax advisor as part of your financial checkup to plan a tax strategy. Here’s your checklist:

• Gather tax documents
• Review your tax withholdings
• Calculate estimated quarterly payments if needed
• Identify tax deduction opportunities
• Schedule a tax advisor meeting if needed

What Is a Financial Checkup?

A financial checkup looks at the current state of your finances to determine what kind of shape they are in and whether you need to make any changes in how you’re handling them to stay on track toward your financial goals.

When Do I Need a Financial Checkup?

Experts suggest conducting a financial checkup each year and after major life events, such as a marriage, divorce, birth, or death.

Can I Do a Financial Checkup by Myself?

If your finances aren’t particularly complicated, you should be able to perform a financial checkup on your own. However, the more complex your financial life is, the more likely that you’ll benefit by engaging a financial planner or other experts to assist you.

The Bottom Line

A financial checkup can help keep you on track toward your financial goals. After completing your checkup, you’ll want to begin implementing any changes you’ve decided to make as soon as practical. Then you’ll be able to relax until it’s time to do it all over again.