5 Vital Steps For Your Personal Finance Health Check

Kreg Bale
Kreg Bale October 21, 2020
Updated 2020/10/21 at 10:15 PM
personal finance health check

Do you know how to carry out a personal finance health check? This article is your ultimate guide. So relax as we take you through!

personal finance health check

It is well known that, when it comes to money or finance, everybody is very cautious or sensitive. But, it is not everybody that is rich or even a billionaire. Most people live flamboyant lives but, their accounts do not show flamboyance. Being wealthy is not about flaunting the most expensive things or spending a lot of money, it is about accumulating wealth. So in this article, we are going to look at how to carry out a personal finance health check. Before we move on, there is a need to understand the concept behind carrying out a personal finance health check. So, what does it mean to carry out a financial health check? To understand the question, you need to know what a financial health check is. A financial health check comprises steps, actions, and decisions carried out to know a person’s financial health or freedom. It involves you finding out how and where your money is going to.

Furthermore, a financial health check is not only for an individual, it could be for a company or small business. Just like Tax Advisers and Certified Accountants have said it, “Financial health check is performed to analyze a company’s financial health. It is often necessary to assess how well the business is performing in comparison with the rest of the industry as a whole so that managers can pinpoint where problems lie”. Like many financial websites and blogs have said, a finance health check is like going to the dentist, which means it’s not done regularly. There is a reason why carrying out a finance health check is important. It is because it comes with its benefits and realizations, which include:

Playing A Major Role In Achieving A Given Financial Goal

With the help of a personal finance health check, you can know how effective your financial goal is in the short and long term. For instance, if you are in your twenties and you plan to save up to $10,000 before you clock 40, then you will need a financial health check. So, that you can know how much income you are getting, how much assets you have, how much liabilities you incurred which include debts, expenses, and others, and how much money you can save to attain your financial goal.

It Serves As A Vital Tool In Developing A Business Plan And Strategy

Every business before it kicks off must have a business plan and strategy to stay focused and achieve success in the global market. Therefore, a business plan is a document that contains the business goals, methods of achieving the goals, and the period it will take to accomplish those goals. So, it is quite important to conduct a financial health check when developing a business plan and strategy.

It Will Help To Paint Your Future Financially

With the use of a financial health check, you can know how much you have made available for savings and investment for the nearest future.  With it, you can know if your business is making profits or losses after you have done the necessary calculation and you can even find out where you are missing it or the financial problem your business is facing.

It Helps You Find Out How Your Money Is Being Spent, Saved, Or Invested

It can be quite hard to know where your money goes to especially when you do not have a budget or finance health check. But, with a financial health check, you can know what you spend your money on, how you can save your money, how much money you make, and even how much you can invest.

It Helps To Prioritize Your Finance

Lastly, with the help of a financial health check, you will be able to know what exactly, do you spend your money on and how to prioritize your finance. It also helps to keep track of your expenses and investment.

Now that we have established an understanding of what a finance health check is all about and its benefits, it is time we look at the 5 Ds involved in a financial health check:

  • Determine your net worth
  • Discover your true net income
  • Design a personal budget
  • Differentiate between needs and wants
  • Distance yourself from lifestyle inflation


Determine Your Net Worth

The first step to follow when carrying out a finance health check is to determine your net worth. This process is quite easy to do on your own, although, many apps can do this for you as well. Many people are quite frightened or even intimidated by the thought of carrying out a finance health check because they might be scared to realize that they have bad spending habits. I must say it is not easy to adjust from a bad spending habit especially when you derive pleasure and momentary happiness from it.

But, it is important to calculate your net worth and know what exactly you have. Whenever a person is referred to as rich or wealthy, it is because they have a huge net worth.So, how can you calculate your net worth? It is quite simple, just list your assets, that is what you own, and list your liabilities, that is what you owe. After doing this, the next step is to subtract your liabilities from your asset, but, mind you, do not add your income to your assets because it’s not an asset but rather a source of income.

More so, you need to note that your net worth says a lot about where you are financially, and the calculation of one’s net worth is not something that is done once in a lifetime, just like Investopedia says, “Calculating your net worth one time can be helpful, but the real value comes from making this calculation regularly (at least yearly)“. For example, if a person has assets (which may include Cash, Investments, Inventory, Office equipment, Machinery, Real estate, Company-owned vehicles)  worth $10,000 and he/she has liabilities (which may include Bank debt, Mortgage debt, Money owed to suppliers, Wages owed or Taxes owed) worth $4,500. Then when the subtraction is done,  $10,000  – $4,500, you will get $5,500, which is the person’s actual net worth.

Discover Your True Net Income

The second D involved in carrying out a finance health check is to discover your true income. Many people in our society of today may have high salaries or a good-paying job but, when the true discovery of their net income is done you will discover that they are just left with money that is only enough to foot the bills for each month.

In discovering your true net income,  that is how much you are earning from your source of income, You have to subtract your expenses from your income. Your expenses are also known as your liabilities, that is what you owe. What you owe may be debts (student loan, medical loan, mortgage loan, and others) taxes, pension, transport, upkeep,  health care, and others. The first step to finding out how much you make exactly as your net income is to subtract tax and transport first from your income. For example, if you make $5000 every month and you are being charged $50 for tax and you spend about $150 on transport, then you are just making $4800 as your net income.

Design A Personal Budget

Once you are done calculating how much you make monthly, the next step is to make a proper budget that covers both income and expenses. Your income could be Salaries/wages, Social security, Tip, Alimony, Bonuses, Interest and dividends, Rents and royalties, Retirement income, Child support, Disability benefit, and any other thing of monetary value you own. While, your expenses could be Insurance, Medical/Health Care, Housing (mortgage or rent, maintenance), Debt payments (car loan, student loan, credit card), and any other thing you spend your money on. Designing a budget is creating a certain amount of money you should spend on your important expenses for a given period, depending strongly on your income.

Differentiate Between Needs And Wants

It is mandatory to note that when creating a budget and placing your expenses on the budget, be mindful of what you regard as important expenses because the availability of money doesn’t mean it should buy all things and there is a big difference between wants and needs. Wants are those things that give you satisfaction or pleasure but, they are not needed for your survival, while needs are the essential things you need to survive like food, cloth, and shelter. With this at the back of your mind, you will be very considerate of what you call important when spending.

Distance Yourself From Lifestyle Inflation

The last D on our steps to carrying out a personal finance health check for today is Distance yourself from lifestyle inflation. So, what does it mean to distance yourself from lifestyle inflation? Lifestyle inflation is an increase in an individual’s expense because of an increase in his income. This is so true with many individuals because when there is an increase in a persons’ income, there is a sudden need to spend more which can lead to a serious financial crisis.

You need to understand that you do not have to feel pressured by people flaunting their wealth because you never can tell the source of their income or the amount of debt they have incurred. So, you need to set your priorities right and stick to your budget but remember it is always good to take care of yourself and your loved ones by getting the good things’ money can buy, but it should be at the expense of a big hole in your finance. So, always use a finance health check to know where and when you are overspending to avoid financial bankruptcy.

Please, kindly leave your views about the personal finance health check.


Share this Article
Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.