7 Steps for Starting a Financial Checkup

“Money is better than poverty, if only for financial reasons.” – Woody Allen

The basics of financial success are fairly easy. Don’t spend money you don’t have. Put away a portion of your income into savings. Budget yourself and invest your money where it can generate returns. The hard part is often making these fundamentals of finance a habit, so it happens automatically.

I believe a great way to create that habit is to start a monthly financial checkup. This means that once per month, you get a birds-eye view of your financial health. Monthly income, expenses, debt, investments, potential threats and opportunities all come together at one point.

Having monthly, or more frequent, reviews isn’t a new idea. But I’d like to focus on how you can implement this habit so wisely managing your finances becomes a ritual.

1) Schedule an appointment with yourself.

It is really hard to justify not spending the time to do a financial checkup. Two hours a month means being aware of the flow of money coming into and out of your life. If you are working forty hour weeks, that you are probably spending at least 170 hours working. Just two hours for a checkup should easily pay for itself with the insights it provides.

Schedule the time off in advance and mark it on your calendar. Doing it when you have time doesn’t cut it. I plan my financial checkup at the first of each month. But if you are busy you might want to make it the first Sunday or Saturday of the month. Consistency is key to making this a habit, so plan it in advance and stick with it.

2) Get organized.

Once you’ve found the time, you need to get all of your financial information sorted into one place. If you already were keeping meticulous records, this should be fairly simple. If your financial information is spread over several different sources, this may take a few hours.

The benefit is that organizing your finances is a one-time investment. Once you develop the habit of organization, it takes less effort to keep everything sorted. If you use a program like Quicken, it can make it even easier by downloading your bank records and guiding you in the process of setting up your finances.

You are finished when you can quickly calculate the following information:

1. Recent income.
2. Recent expenses.
3. Total savings.
4. Total debt or investments.
5. Upcoming expenses (including debt payments if you have them).
6. Upcoming income (including interest if you have been investing).

3) Determine your health level.

Most physicians check a few key metrics when you go for an annual checkup. Blood pressure, heart rate and others depending on your age and medical history. Similarly, there are a few metrics you need to measure if you want to know your financial health.

1. Cash Flow – You could be spending more money than you are earning without realizing it. By finding the balance between upcoming expenses and upcoming income you can see your cash flow for the next month.
2. Interest – How is your debt or investments growing over time? Knowing the exact amount it is growing will help you determine your financial health years from now, and give you the tools to act on it.
3. Disposable Income – This is the amount of money you have left after taxes. For employees it shouldn’t be hard to calculate since your paychecks are deducted in advance.
4. Discretionary Income – This is the amount of money you have left after the essentials. Food, shelter, utilities and basic expenses you can’t ignore are subtracted from this amount.

4) Start a financial health regimen by using the 80/10/10 rule

The 80/10/10 rule basically states that you should be placing 10% of your income into savings, 10% to pay off any debts or make new investments and the resulting 80% is yours. The numbers in this case aren’t as important as the principle. The principle that you should pay yourself first.

Calculating your discretionary income is important. If it is extremely low, you will need to start earning more money (second job, other financial opportunities) or practice frugality to meet your 80/10/10. If your cash flow is negative, that is a serious sign that something needs to change.

5) Implement gradual frugality.

If your recent expenses indicate that you might not be meeting the 80/10/10 rule, or your cash flow is negative, you need to cut back. By making small steps each month, you can solidify them into habits. This means you can start taking control over your finances without a huge amount of struggle.

Take time during your checkup to identify a few ways in the next month you can save more money. Cutting your expenses until you are living within the 80/10/10 rule should be a priority, but if you can’t do it all at once, build up to it slowly.

6) Assess threats and opportunities.

A good financial rule is to balance yourself so that no one threat can destroy you. Build an emergency fund and itemizing the potential problems. This can help you if you face unexpected medical bills, appliance breakdowns or bill increases later.

You should also look towards the upside. Look for potential opportunities you may have in creating more income. Don’t plan your retirement on winning the lottery, but by look for new investments, work or business efforts that could reward you.

7) View the bigger picture.

Just measuring your financial health isn’t enough. Being frugal, budgeting and saving is just controlling a larger problem. I believe the next step is to start investing in yourself. At the end of each of my monthly checkups, I go over new ways I can invest in myself. Ways I can increase the value I’m offering and the skills I have to monetize that value.

Overview of a Monthly Checkup

This monthly checkup may seem large, so here are the basic tips:

1. Schedule it in advance.
2. Get everything organized once, so you don’t have to do it each month.
3. Find the basic patterns (cash flow, discretionary income, etc.)
4. Use the 80/10/10 rule and determine what you need to cut.
5. Write out some ways you can slowly become more frugal to meet the 80/10/10 ratio.
6. Itemize potential threats and opportunities that could change your financial situation.
7. End each checkup with a brainstorm of ways you can increase your value to society and your skills to transform that value into income.

Doing these seven steps should only take an hour or two. But the end result is a full picture of your entire financial health in one source. Real numbers instead of just worries. And solutions for taking control of your future instead of just desires.