Did you know that losing track of unused subscriptions and services could actually be costing you around £40-50 per month? That adds up to a staggering £550-£ 600 per year.
Whether it’s that gym membership you haven’t used in months or insurance policies with unnecessary extras, these financial blind spots silently drain your bank account. Similar to medical check-ups, a regular financial health check ensures your finances remain in good order. This procedure entails assessing your present financial status, pinpointing areas for development, and implementing the required changes to safeguard your financial future.
Furthermore, a financial health check doesn’t have to be tedious or complicated. One can play some music, get comfortable, and start by creating a simple spreadsheet of all expenses. During times of financial setbacks—whether from job loss, family circumstance changes, or economic downturns—understanding your current position helps you work out the best way forward to regain control of your finances.
This straightforward guide will walk you through conducting a personal financial health check, helping you identify unnecessary expenses and create a solid plan for your money. Let’s get started!
Step 1: Understand Your Financial Position
The first crucial step toward financial stability is to get a clear picture of your current financial situation. This foundation will guide all your future financial decisions and help identify areas that need attention.
Gather all Financial Documents
To begin your financial health check, collect any and all relevant financial information, including bank statements, investment accounts, credit card statements, bills, and any other pertinent financial documents. Having these records organised gives you a complete picture of your financial situation and helps you accurately assess your current standing. These documents will reveal spending patterns, debts, and assets that might otherwise go unnoticed.
Calculate Net Worth
Your net worth serves as a key indicator of your overall financial health. The calculation is straightforward: Assets – Liabilities = Net Worth. Assets include everything you own that has financial value, such as cash, investments, property, and valuable possessions. Liabilities, on the other hand, encompass all debts, loans, and mortgages.
A positive net worth indicates your assets outweigh your liabilities—generally a sign of financial stability. Conversely, a negative net worth means you owe more than you own. Tracking your net worth provides a helpful perspective of your financial progress and points out areas that need work.
What is a Financial Health Check?
A financial health check is a thorough assessment of your present financial situation that aids in future planning. This assessment examines various aspects of your finances to determine if you’re on track toward your goals. For individuals, it involves analysing assets, liabilities, spending habits, and savings.
Regular financial health checks are crucial for pin pointing issues before they escalate into bigger and more serious issues. They provide clarity on your financial standing and help create a roadmap for improvement. Consequently, understanding your position now makes it easier to navigate through financial challenges and work toward long-term security.
Step 2: Review Your Spending and Budget
Once you understand your financial position, examining your spending patterns becomes essential. Creating a detailed budget helps you identify areas of waste and redirect funds toward your priorities.
Track Monthly Expenses
Begin by recording all your expenditures over a one-month period to identify where your money goes. To document every transaction, go over bank statements, credit card bills, and receipts. This process often reveals surprising spending patterns and hidden costs, such as account fees or unused subscriptions. Some people discover that small purchases can add up to substantial amounts, making expense tracking a powerful tool for financial awareness.
Needs vs Wants
Categorising expenses into ‘needs’ and ‘wants’ helps prioritise spending and identify areas to cut back. Needs represent essentials for survival, including housing, utilities, groceries, basic transportation, and healthcare. Wants include non-essentials that enhance one’s lifestyle—such as dining out, entertainment subscriptions, luxury items, and hobbies.
Use Budgeting Tools or Apps
Numerous digital tools make budget management more straightforward and more effective. Budgeting apps typically connect to your accounts, automatically categorise transactions, and provide visual representations of spending patterns. Many offer features like bill reminders, goal tracking, and customisable categories. For those who prefer traditional methods, spreadsheets or the “envelope system” are also effective options.
Set Spending Limits that Align with Goals
After analysing your expenses, establish realistic spending limits for each category. The popular 50/30/20 rule suggests allocating 50% of income to needs, 30% to wants, and 20% to savings and debt repayment. However, these percentages should be adjusted based on your personal financial goals. When setting limits, remain flexible—budgets need regular reviews and adjustments as circumstances change. Some individuals find success with the “pay yourself first” strategy, which involves setting aside savings before incurring other expenses. Remember that effective budgeting isn’t about restriction but somewhat intentional spending that supports your financial health and long-term objectives.
Step 3: Evaluate Debt, Savings and Insurance
The third step in your financial health check involves a thorough evaluation of what you owe, what you’ve saved, and how you’re protected. These three elements form the backbone of your financial security and require regular assessment.
List all Debts and Interest Rates
Begin by curating a list of all your debts, from credit cards, to personal loans, to mortgages, and buy-now-pay-later arrangements. For each debt, note the total amount owed, minimum monthly repayment, interest rate, and payment due date. Subsequently, calculate the total interest you’re paying in dollar terms to identify which debts are most expensive. This clarity helps prioritise which debts to tackle first—typically those with the highest interest rates or the highest dollar cost of interest.
Check your Emergency Fund Status
An emergency fund is your financial safety net for unexpected expenses. Research shows that 36% of Americans would struggle to cover an unexpected £370 expense. Your emergency fund should ideally cover three to six months’ worth of living costs. This buffer protects you from needing to resort to credit cards or loans during emergencies, helping maintain your financial stability. If you have a mortgage, think about putting these funds in an offset account or a different high-interest savings account.
Review your Insurance Coverage
Insurance needs change throughout life, particularly as debt levels fluctuate. Major life events—such as marriage, having children, changing jobs, or paying off significant debt—should prompt a review of your insurance. Consider whether your current policies still provide adequate coverage for your circumstances and whether you’re paying for unnecessary extras.
Personal Financial Health Check vs Business Financial Health Check
Although personal and business financial health checks share similar principles, they differ in documentation and focus. Business checks examine balance sheets, profit and loss statements, and cash flow statements. Additionally, they often involve benchmarking against industry standards and evaluating cash reserves, break-even points, and debt management. Unlike personal checks, business reviews should consider customer payment patterns and industry viability measures.
Step 4: Set Goals and Make a Plan
After assessing your current financial situation, the next logical step is to set clear financial goals. A financial health check isn’t complete without creating a roadmap for the future.
Define Short-Term and Long-Term Goals
Financial objectives usually fall into one of three categories. Building an emergency fund or paying off credit card debt are examples of short-term objectives that can be completed in a year. Medium-term goals span one to five years, like saving for a home deposit or increasing investment contributions. Long-term goals take five years or more to accomplish, including retirement planning and mortgage repayment. Accordingly, setting specific and measurable targets—rather than vague aspirations—keeps you accountable. Instead of simply saying “save more money,” aim for “save £3,000 for a house deposit in two years”.
Create a Flexible Financial Plan
Your financial plan must adapt alongside life’s changes. As Marcus and Fleur discovered, priorities shift unexpectedly. Therefore, create a plan with built-in flexibility that can bend without breaking. This might involve establishing decision checkpoints every year or two to reassess assumptions. Moreover, thinking in ranges rather than fixed numbers provides cushioning against life’s uncertainties.
Consider a Free Financial Health Check with an Advisor
Professional guidance can offer a valuable perspective on your financial situation. Many institutions provide free initial consultations to review your circumstances. These sessions help identify problems you might not have noticed and establish clear strategies toward your goals. Throughout these conversations, honesty about your financial position enables advisors to provide the most relevant assistance.
Adjust your Plan as Life Changes
Financial planning isn’t a one-off exercise but an ongoing process. Major life events—such as marriages, career changes, or health issues—necessitate revisiting your plan. Indeed, what you want today likely differs from what you’ll need in five years. The most successful financial planning involves regular reviews that embrace change instead of resisting it.
Conclusion – Financial Health Check
Financial health checks serve as powerful tools for anyone seeking to gain control over their finances. Throughout this guide, we have explored a straightforward four-step approach that anyone can implement. Understanding your current financial position provides essential clarity about your assets and liabilities. Additionally, reviewing your spending habits helps identify those silent drains on your bank account—like unused subscriptions costing upwards of £600 annually.
Evaluating debts, savings, and insurance forms is another critical component of your financial assessment. Many people overlook these areas until problems arise, yet they represent the backbone of long-term financial security. Last but certainly not least, setting clear goals transforms vague financial hopes into achievable targets with concrete timelines.
Regular financial check-ups should become as routine as medical examinations. Most experts recommend quarterly reviews of your budget and spending patterns, while a comprehensive assessment might occur annually or after significant life events. This consistency enables you to identify troubling patterns before they escalate into serious problems.
The benefits of this practice extend far beyond simply tracking expenses. A thorough financial health check empowers you to make informed decisions, eliminate wasteful spending, and redirect money toward priorities that truly matter. The peace of mind that comes from knowing exactly where you stand financially proves invaluable during both stable periods and unexpected challenges.
Remember that financial health management represents an ongoing journey rather than a one-time event. Circumstances change, goals evolve, and financial plans must adapt accordingly. Therefore, take the first step today—gather those financial documents, calculate your net worth, and begin building a stronger financial foundation for your future.
How often should a financial health check be done?
It’s recommended to review your budget and spending patterns quarterly, with a more comprehensive assessment annually or after significant life events. Frequent inspections enable you to identify possible problems before they worsen.
What are the key components of a financial health check?
The key components include understanding your financial position, reviewing your spending and budgeting, evaluating your debt and savings, assessing your insurance coverage, and setting financial goals.