How To Conduct a Financial Checkup

Financial experts recommend running through a personal financial checkup at least once a year or after significant life events such as marriage, divorce, the birth of a child, or the death of a family member. This checkup helps you stay on track toward your financial goals and enables you to make any adjustments you need as your life or the economy changes.

This guide will walk you through each part of a complete financial checkup with a checklist of actionable steps to help set you up for future success.

1. Life Changes Review

To begin your financial checkup, take stock of any major life changes in the last year or since your last review. Common ones include changes to your job and any other income, changes to your relationship or family, relocations, major purchases, windfalls like an inheritance, unexpected expenses such as paying to repair storm damage to your home, and changes to your health that might mean you’ll need more or different health insurance.

For each change, consider how it affects your income, expenses, savings, insurance needs, and investing strategy.

2. Review and Assess Your Financial Goals

Next, check your progress toward your financial goals and set new ones as needed.

Set up or update your financial goals, organizing them by time frame:

• Short-term goals (within a year): Build an emergency fund, pay off small debts, save for a vacation, or make minor home improvements.
• Medium-term goals (one to five years): Save for a down payment on a house or vehicle, purchase a car, fund an education, or launch a business.
• Long-term goals (more than five years): Retirement planning, pay off a mortgage, fund children’s college education, or achieve financial independence.

Each goal should fit the widely used SMART framework:

• Specific: Clearly define what you want to accomplish
• Measurable: Include concrete amounts and dates
• Achievable: Set realistic targets
• Relevant: Align with your values and broader life objectives
• Time-bound: Establish a timeline with specific deadlines

Document your goals in writing and the specific actions needed to achieve them.

3. Review Your Budget

A budget serves as the foundation of your finances. During your checkup, review your income, expenses, and spending patterns to ensure your budget aligns with your income and goals.

Start by calculating your total monthly income from all sources:

• Primary job
• Side hustles or part-time work
• Investment income
• Rental property income
• Alimony or child support
• Government benefits

Next, list and categorize all your expenses. Consider using the following categories:

• Housing (mortgage/rent, utilities, maintenance)
• Transportation (car payments, gas, insurance, maintenance, public transit)
• Food (groceries, dining out)
• Healthcare (insurance, out-of-pocket expenses)
• Personal (clothing, entertainment)
• Debt payments (student loans, credit cards, personal loans)
• Savings and investments
• Miscellaneous (subscriptions, memberships, gifts)

Compare your actual spending over the past few months with what you originally budgeted. Look for discrepancies and patterns. Are there categories where you consistently overspend? Work to address any issues you see.

4. Review Your Debt

Begin by doing an inventory of all your debts:

• List each debt (mortgage, auto loans, student loans, credit cards, etc.)
• Note the current balance
• Record the interest rate
• Document the minimum monthly payment
• Note the time until the debt is paid off

Once you have this information, calculate your debt-to-income ratio by dividing your total monthly debt payments by your gross monthly income. Financial advisors often suggest using the 28/36 rule: your overall debt ratio should be less than 36%, with no more than 28% going toward housing debt.

If your debt levels are high, develop or refine your plan to pay off your debts. Consider these two popular approaches:

• Debt snowball method: Focus on paying off your smallest debt first, no matter the interest rate, while making minimum payments on all other debts. Once the smallest debt is eliminated, apply that amount to the next smallest debt, creating momentum as you progress.
• Debt avalanche method: Target the debt with the highest interest rate first, while making minimum payments on all other debts. This approach minimizes the total interest paid over time, though it can make it harder to see how much you’re progressing.

5. Check Your Credit Reports

Your credit report and score impact everything from loan approvals to insurance rates, making this review an essential part of your financial checkup.

Federal law entitles you to one free credit report annually from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. They are available through the official website, AnnualCreditReport.com, or by contacting each bureau directly.

6. Review Your Retirement Savings

Start by reviewing the balances in all your retirement accounts, including the following:

• Employer-sponsored plans (401(k), 403(b), 457, etc.)
• Individual retirement accounts (Traditional and Roth IRAs)
• Self-employed retirement accounts (SEP IRA, SIMPLE IRA, Solo 401(k))

Financial experts generally suggest saving 10% to 20% of your pretax income for retirement. At a minimum, ensure you’re contributing enough to your employer-sponsored plan to receive any matching contributions—this is essentially free money you don’t want to leave aside.

Next, review your investment allocations to confirm they align with your risk tolerance and time horizon. Generally, the closer you are to retirement, the more conservative your portfolio should become. Consider whether your current asset allocation (the mix of stocks, bonds, and other investments) needs rebalancing to match your risk profile.

7. Review Your Other Savings Goals

Your financial checkup should evaluate progress toward other important savings goals. First, check your emergency fund—typically recommended to be three to six months of income for essential expenses in an easily accessible account.

Review your progress on specific savings goals like a home down payment, getting a new car, education funds (529 plans or other college savings accounts), travel or vacation savings, and major purchases or renovations.

For each savings goal, determine whether your current savings rate will enable you to reach these goals on schedule or if adjustments are needed.

8. Make Sure You’re Properly Insured

Start with your life insurance. If you have dependents, confirm your coverage amount would adequately replace your income and cover major expenses like your mortgage or education costs. Review your beneficiary designations to confirm they reflect your wishes.

Check your health insurance to determine whether your current plan still meets your needs, then review your property insurance, including homeowners or renters insurance and auto insurance. Confirm that coverage limits adequately protect your assets.

9. Review Your Estate Plan

Even if your assets are relatively modest, estate planning ensures your wishes are carried out and minimizes complications for your loved ones. During your financial checkup, review all estate planning documents to confirm they’re current and aligned with your intentions.

Verify that your chosen executor or trustee is still the one you want and is willing to do the job. Check that the distribution of assets reflects your current wishes, especially if you’ve experienced significant life changes since your last update.

You’ll want to review your beneficiary designations on all financial accounts. These designations typically override instructions in your will, making them a crucial part of your estate plan.

10. Don’t Forget To Review Your Taxes

Review your tax withholdings to see if they’re correct. The IRS has an online Tax Withholding Estimator that does much of the work for you. Adjusting your withholdings can prevent owing a large sum at tax time or receiving an unnecessarily large refund (which essentially means you’ve given the government an interest-free loan).

If you’re self-employed or receive income that doesn’t have taxes automatically withheld, check your quarterly estimated tax payments. Inadequate or late estimated payments can result in penalties, even if you’re ultimately due a refund when you file your annual return.

The Bottom Line

A comprehensive financial checkup gives you a clear picture of your finances and helps ensure you’re making progress toward your goals. While it may seem like a big undertaking, breaking the process into these manageable steps makes it less overwhelming.

After completing your financial checkup, create a timeline for addressing each action item you’ve identified, starting with those that will have the greatest impact on your financial well-being.