How to Assess Your Current Financial Situation in Financial Planning

So, we’re continuing our review of the financial planning process and today we figured we’d discuss the information gathering process. Assessing your current financial situation is a fundamental step in the financial planning process. It involves thoroughly examining your financial standing, understanding your strengths, weaknesses, opportunities, and threats. Below are some of the key elements of the information gathering process:

Income and Expenses

Begin by evaluating your income sources, including salary, bonuses, investments, rental income, etc. Calculate your net income after deducting taxes and other withholdings. Next, analyze your expenses, including fixed costs (e.g., rent, mortgage, utilities) and variable expenses (e.g., groceries, entertainment). Understanding your cash flow helps identify potential areas for improvement and savings opportunities.

Assets and Liabilities

Take stock of your assets, such as cash, savings accounts, investments, real estate, and other valuables. On the other side, assess your liabilities, including credit card debt, student loans, mortgages, and any other outstanding loans. This exercise helps determine your net worth and reveals if you have more debts than assets.

Fun fact (or not so fun, realistically)

According to Business Insider which cited a 2019 Survey of Consumer Finances by the Federal Reserve, the median net worth for folks under the age of 35 is only $13,900.

Emergency Fund

Evaluate the status of your emergency fund. An emergency fund is essential to cover unexpected expenses, such as medical emergencies or job loss. It's generally recommended to have enough to cover 3 to 6 months' worth of living expenses.

Credit Score and Report

Check your credit score and obtain your credit report. Your credit score influences your ability to obtain loans and interest rates. Review your credit report for any errors or discrepancies that need addressing.

1. This is also an important step in case you’re in need of financing for your personal or business needs (which we can also help with, of course), but it can also help prevent or detect identity theft.

2. Remember, a key aspect of your financial health is related to your credit score. If you're concerned about your credit score and want to work on strengthening this aspect, we suggest you consider our partners who specialize in building & repairing credit health.

Investments

Analyze your investment portfolio, including stocks, bonds, mutual funds, retirement accounts, and other investments. Assess the performance and risk level of each investment to ensure they align with your goals and risk tolerance.

Insurance Coverage

Review your insurance policies, such as life, health, disability, home, and auto insurance. Ensure you have adequate coverage to protect against potential risks and unforeseen events.

Retirement Savings

Evaluate your retirement savings, such as contributions to 401(k), IRAs, or other retirement accounts. Determine if you're on track to meet your retirement goals and adjust your contributions as needed.

Tax Situation

Understand your tax situation and assess any potential tax planning opportunities. Maximizing tax deductions and credits can help optimize your overall financial plan.

Family and Dependents

Consider the financial responsibilities you have towards your family or dependents. This could include educational expenses for children or providing support for elderly parents.

Healthcare and Estate Planning

Assess your healthcare needs and understand your estate planning documents, such as wills and trusts. These are crucial aspects of safeguarding your assets and ensuring your wishes are fulfilled.

By thoroughly assessing your current financial situation, you gain valuable insights into your financial health, strengths, and areas that require improvement. This understanding forms the basis for developing a comprehensive financial plan that aligns with your goals and sets you on the path to financial success and security. It also helps your financial advisor tailor their advice and recommendations to your specific needs and circumstances. Reach out today and take a positive step towards your financial future.

*Not financial/legal advice