How to do an Annual Financial Checkup

Are you on the road to financial freedom or do you need to make a u-turn? You may have had your annual medical checkup and taken your car in for scheduled service this year, but what about your annual financial checkup?

If you were on a long road trip, you'd stop occasionally and look at the map to see if you were headed in the right direction. An annual financial check up serves the same purpose. It's an opportunity to review how you've done financially over the past twelve months and make sure you're still headed in the right direction.

A good time to do your annual financial checkup is before the end of the year so you can take advantage of any tax-saving strategies, but if you can't fit it in during the busy holiday season, plan on doing it as soon after the New Year as possible.

1.Identify Your Goals

The first step in your financial checkup is evaluating your financial goals. Hopefully, you’ve established these in previous years, but if you haven’t now is an excellent time to set some. Goals are really milestones that we use to measure forward progress. Have you made progress on them this year? If not, where have you fallen short? Can you figure out why?

Review your previous goals. Setting goals can result in dramatic improvements in your finances, but only if you know what the goals are, and you keep reminding yourself that you have them. This is one step you probably should take monthly, rather than annually. Reinforcement is how you make goals real in your life.

Evaluate your progress toward your goals. A goal is a wish with an action plan attached to it. That means you should be making steady progress toward reaching that goal. You should regularly review the progress to make sure that it’s happening, but also to tweak your action plan to help you accomplish the goal even quicker.

Assess the impact of changing circumstances and priorities for your goals. You may find that as your life changes, certain goals may become more important, others less so, while still others are fit to be abandoned. At least once each year, make sure that your goals are consistent with where you are in life right now. If you have achieved a goal, celebrate the victory, then cross the goal off your list. It may be time for a new one.

Look for savings. In reviewing your policies, look specifically to see if you might be over-insured in any area. A good example is life insurance. If you no longer have dependent children, you may not need as much coverage as you had before. You should also shop to see if you can replace any current policies with less expensive options from competitors. Finally, take a close look at the deductible on each policy. If you have more savings available than you had in the past, you may be able to increase deductibles and save a lot of money. Car insurance deductibles  are an excellent example. If you have an extra N250,000 in your emergency fund, you can safely increase your car insurance deductible from, say N100,000.00, to N250,000.00 without increasing your personal risk.

Makes sure you have all necessary coverage. This can include insurance on your business, and especially disability insurance. Both types of coverage relate to your ability to earn a living and are often overlooked in favor of saving money. But, if you have the extra cash flow available, at least some of it should be earmarked for income protection insurance.

2.Evaluate Changes in Your Personal Situation

Have changes in your personal situation taken place in the last year or do you anticipate any major changes in the near future? A job change, adding a baby to your family, retiring, buying a house, getting married, or moving can alter your income and your lifestyle significantly. You may need to adapt your budget, your spending, your savings, and your investments. Having time to plan for these changes in advance will make the transition much smoother.

3. Your Budget

Budget is truly the foundation of all personal and household finances. If your budget is working as it should, you can practically put your goals on auto pilot! If you have no budget, it will be tough to accomplish anything at all.

If you don’t have a budget, make one. Not having a budget just means that now is the time to get started. Fortunately, there are good budget soft ware apps you can use that will not only help you put a budget in place but help keep track of your expenses.

Review your budget. You should be reviewing your budget at least monthly to make sure that it is doing its job. Make sure that expenses are being properly categorized and income is being fully recorded. Your budget should be providing you with a good picture of your cash flow, and – particularly – of how much you have left over after all of your expenses are paid. Of course, that’s the whole purpose of having a budget.

Adjust savings, investment, and debt payoff allocations. Your budget should reveal that you have a positive cash flow. What you do with that surplus will make all the difference in your finances going forward. Make sure that it is going toward those categories that will improve your situation – including savings, investments, and debt payoff.

4. Your Investments

Setting your investments on auto pilot  makes the job easier. But, you still need to do a review of your progress at least annually.

Reassess your risk tolerance. As you get older and your circumstances change, it’s likely that your risk tolerance will too. This is especially true as you get closer to retirement, but there are other factors as well. For example, if a 10% decline in the market would spook you, you may want to lower your exposure to equities.

Rebalance your portfolio. If you have multiple investment accounts, you may have to make some manual adjustments. The only way to do this is by knowing what your big picture portfolio allocation is. Once you do, you can rebalance accordingly. You should be rebalancing your investments on a big picture level at least once a year.

5. Your Debts

The ultimate objective with debt is to make it go away, at least in time for retirement. The only way to do that is if you are tracking it regularly.

Do an annual debt summary. It’s easy to get so accustomed to debt that you simply pay the monthly bills, and ignore the big picture. You may have no idea how much total debt you’ve actually accrued! At least once a year you should summarize all of your debts so that you know exactly how much you oweEvaluate your progress in getting out of debt. An annual debt summary will also indicate the total level of debt from one year to the next. That level should be declining each year. If it isn’t, the summary will give you an opportunity to implement strategies to make it happen.

Look for opportunities to lower your interest rates. The summary will provide a chance to review the interest rate you’re paying on your loans. You should compare these rates to what is available elsewhere. You may be able to obtain lower interest rates with a little bit of research. Lower interest rates help improve your cash flow and enable you to dedicate more cash flow to repayment of debt principal.

6. Your Retirement

At least once a year, review your retirement savings to make sure the level is consistent with your retirement goals. You can pay a specific amount to a Pension Fund Administration or Put in fixed deposit account or invest in government bond  so that you will not be financially stranded at retirement, with this you can have something to fall back to.

We are in a new era, at retirement it might be your children you might want to depend on are still struggling with their finances. It is better you make this wise decision now.

7. Update Your Short- and Medium-term Savings Goals

You probably have more savings goals than just retirement.

Prepare for the Unexpected

Have an emergency fund account it will be a sort of savings that you can only access when an emergency situation occurs.

Recently a neighbor of mine who earns N300,000.00 monthly was to spend N120,000.00 to repair their family car which was their only source of movement and her baby fell ill at the same time, these were all unexpected events these devastated her and she had to go a borrowing to solicit for funds to handle this situation. According to her, she has exhausted all her salary before 18th of the month and damn broke which made her run into debt.

If she had an emergency savings account this could have saved her all the stress.

Make sure your emergency fund matches your current circumstances. Ten years ago a N500,000.00 emergency fund may have been adequate for your circumstances. Is that still the case? Have your income and expenses grown to a point where the fund needs to be increased? If so, there are relatively painless ways to increase your emergency fund.

Creating and updating contingency savings plans. You should have savings plans set up for known contingencies. This could include replacing the roof on your house, replacing your car, or even saving money for a vacation. By adding budget categories for each of these contingencies, you can build the accounts gracefully and avoid a last-minute scramble to raise the money – or worse yet, borrow it.

Review college funding for your children. If you have children, you should be making some sort of provision for their college education. You can do this by opening a kids savings account for them. This what I do for my children, immediately after the naming ceremony any cash gift given to them goes into the account and as a parent I have a stipulated amount I save in that account on a monthly basis.

Wrapping Up

There’s no doubt that an annual financial checkup can be a complicated process. We hope this checklist will make it simpler! You can make the entire process easier by reviewing individual areas throughout the year. Regardless of your process, just make sure that it gets done. Reviewing your finances is your best chance to make sure that your finances are moving forward and that you’re on track to reach your goals.

Take your  time and give yourself a Financial Checkup.

 

 

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