By Mukesh Malhotra
A financial health check is important as it helps you show where you currently are and makes you understand what you need to do to achieve your goals.
Here are five factors that you should consider when doing a financial health check:
Figure out where you currently stand financially
A proper financial health check requires detailed knowledge of where you stand so that you can then make plans to go forward.
For a basic understanding of your current fiscal situation, try the Money Advice Service’s Money Health Check Tool. The tool isn’t meant to replace a detailed financial check, but it can give an overall idea of where your stand regarding things like your pension and debt.
With that overall figure in mind, you can then sit down to work out the specifics. You need to start with an understanding of your total debt, your expenses and your net worth. This includes any investments, savings and property-earning income that you might have.
Set financial goals or evaluate your current ones
If you don’t have financial goals set up, it’s time to come up with some. This could be anything from paying off credit card debt to saving for a downpayment on a house or investing a certain amount every year.
A financial health check without goals will not really get you anywhere. You also need a plan so that you know where your money needs to go.
Take a look at your savings
If you don’t have an emergency fund, it’s time to set one up. Start small if you have to, but keep in mind that experts recommend saving up to three months of living expenses. Having an emergency fund will keep you from having to borrow or go into debt in an emergency.
If you have a healthy emergency fund set up, then look into investing. Financial health is about planning for the future, and having a diversified portfolio is key to good net worth.
Check your credit report
Keeping a close eye on your credit score is an essential part of a financial health check. A healthy credit report will improve your chances of getting approved for a loan or mortgage. It will also get you better interest rates when you do get a loan.
Checking your credit report regularly will help you discover any potential issues, such as errors or fraud.
Make insurance part of your financial health check
Insurance is one thing that most people ignore when looking at their finances. It’s important to ask whether you have enough insurance.
Start by looking at your current insurance policies to see if the coverage you have is enough. For example, does your home insurance cover damage caused by the dog you got since your last renewal? Is your car getting older, meaning it would be ideal to add road assistance to your car insurance?
Whatever it is, your insurance policy is there to protect your assets. Just because your insurance was perfectly adequate a few years ago, doesn’t mean it is now. Needs change, so revise your coverage if necessary.