At my last annual checkup, my doctor asked me a series of questions and ran through a list of tests. My levels were well, but there have been years when they weren't—and I had to follow a plan to improve them. Learning what goes into that plan helped me improve my future outcome.
Similarly, everyone needs an annual financial checkup. But instead of checking your cholesterol and pressure at the doctor's office, you should be evaluating how you budget your money and manage your debt levels, among other things. After an evaluation, you'll want to create a long-term plan, because unlike a health test, a financial test develops with time.
So, how do you figure out which financial areas to include in your next checkup and which need improvement?
Step 1: Figure Out What You Need
The first areas to examine in your financial checkup should always be your objectives and then your budget. You should add up your necessary expenses (things like rent, cellphone bill, and gas) and keep them lean. On the other hand, closely monitor your variable expenses (extra things, like movies, restaurants, and clothes). To stay in shape, keep a weekly balance of your expenses and track them monthly.
Similar to your blood pressure, you don't want to go over your recommended spending levels—otherwise, your decisions may result in an irreversible hit in your wallet. And, no pills available make that go away; just more work.
Step 2: Review Your Debt And Equity
The second step of your checkup will consist of evaluating your debt-to-equity levels. You should always save 10% to 15% of your income and keep your debt levels under 30% of your income. Similar to good and bad cholesterol, your savings rate can go up to 100% (if you can do that, congrats!); however, your debt level going higher than 30% could be detrimental to your financial health.
To help you prevent reaching a high debt level due to unforeseen emergencies, you should always have an emergency fund. This is a fund with enough money to cover 3 to 6 months of your fixed expenses. Having this fund keeps you from using high-interest credit cards or borrowing money in case of an emergency.
After you have an emergency fund, you should work on building a high-equity level, which entails savings or investing. Consider these practice as a vaccine toward a future severe "debtitis" whose only remedy is insolvency. Or "inflationitis."
Step 3: Build A Plan You'll Find Fulfilling
When my doctor called me a couple of years ago regarding lower than expected levels in a certain area, I researched information to bring these up and ended up changing my eating habits. I became more conscious about calories and quality of food and careful not to eat junk food. And I increased those levels!
Similarly, do your research so you buy things that last for a lifetime—not just a day. Doing good research and reading financial planning-related articles, tips, and experiences from experts will help you stick to a plan and, hopefully, save you money through the years.
Step 4: Make It A Positive Experience
Remember that "health" is something we can't buy more of. Taking care of it will improve the way we feel, give us more energy, and make us more engaged and motivated. Keep track of your financial health plan today. Review it every year. And enjoy life!