Steps for conducting a personal financial review

When was the last time you took a real look at your personal or household finances? Not a casual glance at your credit card bill or checking account balance, but a comprehensive review of your current financial situation?

If you’re like many of us, it may be easier to remember when you had your last physical. Because while finances are often top of mind, we rarely take the time to sit down and carefully review our finances. But we should. Because like an annual physical, a financial review can detect small problems before they become big problems, and the results can help you improve your overall financial health. This article will help you understand:

• What a financial review is, and why it’s important

• The financial information you’ll need to get started

• The three key steps involved in a personal or household financial review

What is a financial review and how can it help?

A financial review is a process in which you or your household (i.e., you and your spouse or partner) carefully review and evaluate your current financial situation including income, expenses, budgets, assets, liabilities, and financial goals. The primary purpose is to help you gain a clear understanding of your overall financial picture, which can go a long way to reducing any anxiety about your economic well-being. A review can also give you the information and insights you need to maintain or improve your financial situation moving forward.

Regularly conducting a financial review - whether on an annual or semi-annual basis - can help you:

• Make necessary adjustments to your financial strategy and budget

• Set appropriate financial goals

• Identify potential problems early and address them before they become major financial issues

If you want to have greater control of your finances – and start working towards a more secure financial future – there’s no better time than now to get started.

Things you’ll need to begin your financial review

It will take some time and effort to do a complete review of your personal or household finances, but don’t be daunted: if you take it one step at a time it may actually be easier than you think. Try to set aside a couple of hours when it’s convenient for you and begin. And, if you have a spouse or partner, they should be included in the process. Reviewing your finances together can provide a great opportunity to share your thoughts on all kinds of important things, from vacation budgets to lifestyle changes and retirement plans.

Start by gathering and organizing essential information about your personal or household income, expenses, savings, debts, and investments. This will include:

• recent pay stubs

• bank, IRA, and investment statements

• credit card bills

• expense receipts

• mortgage, student loan, and auto loan statements

• and anything else that reflects your current income, assets, and spending

And while every person’s situation is unique, if you want to perform a truly comprehensive review, you’ll also want to have insurance policies, tax returns, and estate planning documents close at hand. Once you have all the information, grab some paper and a pen – or open your laptop and follow the steps below.

STEP 1: Lifestyle Review

The first step in a financial review is to take a close look at how you are currently living and to determine whether you’re in a position to maintain or improve your lifestyle, or whether you should consider making financial changes – such as finding ways to increase income or decrease spending. Here’s how:

Review monthly income from all sources

Calculate your total personal or household income from all ongoing sources, including employment, investments, rental properties, and – if you’re already retired or semi-retired - Social Security benefits and pensions. Be sure to factor in (i.e., subtract for) taxes so that your total reflects after-tax income.

Review monthly expenses and spending

A close look at your expenses and spending can help you better understand spending patterns, take more control over spending, determine whether your current expenditures are sustainable, and, if not, help you develop a workable budget. You can do it the old-fashioned way - with pen and paper – you can use a traditional spreadsheet or take advantage of online apps that help automate much of the process:

• First, create a comprehensive list of all your expenditures – from major expenses such as rent or mortgage payments to "incidentals" such as cab fare and lunch at fast food restaurants.

• Then, break your expenses down into three categories – essential, savings and debt repayment, and discretionary – which includes everything from summer vacations to holiday gifts.

Balance your budget

The next – and possibly the most important – part of a financial review is determining whether your current income can support your current spending with funds left over for savings and investment. If the answer is no, it’s important that you find a way to eliminate the gap between income and spending – better known as balancing your budget.

Creating a budget that covers current expenses and allows for savings toward future goals can provide financial stability and can help reduce financial stress. There are many approaches to building a personal or household budget, but one of the simplest and most popular is the 50/30/20 budgeting rule:

1. Calculate your monthly household income after taxes.

2. Calculate your essential costs and expenses – rent or mortgage, food, transportation, insurance - which should comprise approximately 50% of your after-tax income. If they are more than 50%, try to adjust your spending habits.

3. Set aside 30% of your after-tax income for discretionary expenses such as dining out, streaming services, gifts, and vacations. If 30% won’t cover them, think about what you might cut out.

4. If possible, allocate at least 20% of your after-tax income towards savings and debt repayment. This includes emergency funds, retirement contributions, loan repayments, and saving for long-term goals such as paying for college or buying a house.

5. Keep records to help you stay within the 50/30/20 percentages.

6. Review your budget regularly and adjust it as necessary, especially if there is a significant change in your income or circumstances.

Remember, the 50/30/20 plan is a guideline, and you can modify it to suit your specific needs. The key is to establish a budget that allows you to maintain your current lifestyle and save towards a more stable future.

STEP 2: Review your financial goals

Once you have a clearer picture of your current finances – and have determined what adjustments may be required – you can move on to a look at your plans and hopes for the future. So take a minute to review and define all your short- and long-term financial goals – whether they’re as simple as saving for a summer vacation or as involved as saving for retirement or a down payment on a home. Then think about which ones are most important to you and what it will take to achieve them:

1. List your goals in priority order.

2. Define a specific timeline and target cost for each goal: How much money will you have to save? And by what date?

3. Think about whether your list of goals is realistic and, if not, try to adjust it to better meet your current financial situation.

If you’re finding it hard to define your goals, try applying the SMART formula: It’s a popular financial guideline that recommends setting goals that are Specific, Measurable, Achievable, Relevant, and Time-bound (i.e., to be accomplished within a specific timeframe).

Defining specific financial goals, prioritizing them, and assigning a dollar amount and timeline to each will help you determine whether they are realistic and attainable or whether you need to alter your "wish list" to better reflect your financial situation.

STEP 3: Review savings and investments

After considering where you want to go in terms of financial goals, the next step is to find out how close or far away you are from your destination. That generally means reviewing your financial assets and, if necessary, finding a way to apply more of your income to growing those assets. For most people, there will be three key areas for review:

• Savings, checking and money market accounts
  If you maintain any of these accounts to meet monthly expenses or short-term goals – such as saving for a vacation or creating an emergency fund for unexpected expenses such as car repairs – make sure that you’ll have the funds you’ll need when you need them. Also, look at interest rates to see if you can make money in these accounts work harder.

• Investment portfolios
  If you’re an investor, it’s essential to review your holdings regularly to make sure that you’re getting sufficient returns. If you’re not, it may be time to reallocate your funds to different stocks, bonds, or mutual funds that may yield higher returns without exceeding your risk tolerance. Don't forget to look at account fees and costs, which could be eating into your investment returns.

• Retirement accounts

  If you’ve already started saving for retirement – via a 401(k), Individual Retirement Account (IRA) or one of the many other retirement savings options - be sure to review your balances regularly to make sure that you’re on track to meet your retirement savings goals. If you’re unsure what that goal is, try using an online retirement calculator to help. Also, as you get closer to retirement, consider reallocating your investment portfolio so that the investment risk is appropriate for your investment horizon.

If after reviewing your various accounts, you feel that changes or adjustments are in order – and you’re not 100% confident in your ability to balance investment risk and reward or make the right decisions – think about speaking to a financial professional with experience or that specializes in investments or retirement planning.

Additional steps to consider

The three steps outlined above are the essential components of a personal or household financial review. That said, if you want to take a deeper dive into your financial situation, consider looking at the following areas:

Insurance review

Is your health insurance – and that of your partner, spouse, or children, if applicable – adequate? Are there exclusions that you should be aware of? Are there alternatives that offer more protection at a reasonable cost? Or similar protection at a lower cost? If you have dependents, should you have life insurance to protect them in the event of your death? If you already have life insurance, is your coverage still adequate or should you increase it? And since the risk of disability is higher than the risk of death, do you also need disability insurance, which replaces a portion of your income if you’re unable to work due to illness or injury?

Education review

If you have children who will one day go to college, does that goal reflect your current and anticipated financial circumstances? Will you be able to afford four years at a private institution or should you set your sights on a state university or community college? Are you taking full advantage of your state’s 529 college savings plan? Are the interest rates or investment returns on track to save sufficient funds? If not, is there any way to increase your contributions? If you’ve yet to open a 529 plan, should you consider doing so?

Tax review

Is your employer withholding enough taxes, or will you be hit with a big tax payment on April 15th? Are you using all the tax deductions and credits for which you’re eligible? Are you taking full advantage of your tax-advantaged retirement accounts? Is your investment portfolio optimized for tax efficiency? If you have college-bound children, should you be enrolled in a 529 college savings plan? Should you consider setting up a Coverdell Education Savings Account (ESA)? Should you speak with an accountant or other financial professional to look for more tax-saving ideas and strategies?

Estate planning review

Do you have assets that you’d like to pass on to your dependents or other beneficiaries? Do you have a legally executed will or trust in place? If yes, is it up to date with recent changes such as a new family member, a marriage, or a divorce? Is your will or trust optimized in terms of minimizing estate taxes and protecting the financial interests of your beneficiaries? Is there a need to change appointed executors, trustees, or guardians?

You can do this. And Guardian can help.

Regular financial reviews can play an important part in helping you achieve your life goals. And hopefully, you’ll be able to use the tips above to get started on your own. But if you need guidance moving forward – on more difficult issues such as retirement planning or using life insurance to help secure your family’s future - Guardian can help. To find a Guardian financial professional near you, just fill in your zip code and click below.