Just like you get an annual physical, you should also get a financial physical.
That’s the premise of this article and I have to say I agree!
It’s just common sense, really. Without a periodic check of your finances, you have no way to know if you’re on track or not until it’s too late.
So what should your financial check up include?
Net Worth.
Put simply, you should own more assets than liabilities. an asset is something that either generates income or could be sold relatively easily for cash. A liability is something that is either worth less than you owe on it, or that takes money out of your pocket. Work for assets and avoid liabilities.
Rates and Ratios.
Check your debt to income ratio (D/I) and savings rate. You want a small D/I ratio, and a large savings rate.
Spending vs. Income.
DON’T SPEND MORE THAN YOU EARN. I’m sorry to yell like that, but it’s one of those concepts that is so simple to understand that people gloss over it and forget it altogether.
Life changes.
Be sure to adjust your finances any time your life changes. For example, if you have a new baby, make sure your life insurance is in place and adequate. If you lose your job or take a pay cut, adjust your spending accordingly.
Insurance.
Make sure your life insurance, car insurance, homeowners insurance, etc are up to date and are adequate to cover the item insured.
Estate planning.
This is often something that needs updating when your life changes. For example, you buy a home or have a child.
Portfolio asset allocation.
You should readjust your 401(k) or IRA asset allocation at least once a year, and possible more if there’s a large shift in the market. A good example of this is the recent market plunge of 2008. Many retirement accounts ended 2008 not just down, but out of balance. It’s important to rebalance or you can end up holding too much in stocks or bonds when the tables turn again.
If you want the in-depth discussion of each of these topics, you can read the article here .
Nice summary for the article. It allows for a quick overview and calculation for the financial health. Would have been a good idea to add it to the original article too.