5 Things to Take Care Of When Reviewing Your Finances
Reviewing your finances is a fundamental step in managing your money well. How would you know if your financial plan is still sound and still aligned with your short-term and long-term goals if you don’t check in on your finances periodically? So, consider carving out some time every 3 or 6 months to review your financial plan so that you can make adjustments to your plan to fit where you are in life right now. Here are some of the things that you can check and take care of during your review.
Prioritise paying off your high-interest debt
If you’ve accumulated some debt on your credit card over the last 3 to 6 months, you should pay off your credit card debt before even thinking about putting money towards savings and investments. Don’t wait to pay off your credit card debt until you get your bonus at the end of the year, because the high interest will eat into your savings over that time. How much exactly?
Let’s do the math: Say you have $5,000 USD outstanding on your credit card and you just pay the minimum balance (3% of the outstanding). At the end of 6 months, your credit card debt would have cost you an additional $591 USD in interest! That’s almost $600 USD that could have been used for other cash needs, or put towards your savings.
Top up your emergency fund
If you’ve used part of your emergency fund to pay off some unexpected expenses recently, don’t feel bad! That’s exactly what an emergency fund is for! You got through life’s speed bumps with your savings and investing plan intact. Well done. So now, as you’re checking up on your finances, make sure to top up your emergency fund back to your target amount.
If you’ve almost depleted your emergency fund, look at your budget to find ways to funnel your savings to top up your emergency fund. Whether that means reallocating the money meant for your vacation fund to your emergency fund for a month or two or delay putting a downpayment on a home for a few more months, so be it. It’s more important to have a safety net in place so that you don’t end up making the costly mistake of liquidating your investments just to pay for a short-term setback.
Make sure you have at least 6 months of living expenses in your emergency fund before you even start setting money aside for other financial goals. If you haven’t set up an emergency, now’s the time to start building one.
Check your monthly budget
As you go through life, your spending habits can also change with it. How will you know if you’re spending more money on eating out at restaurants than you initially budgeted for? Reviewing your monthly budget every now and again helps you recognise which areas you’re spending more money on than you initially planned so that you can take action to reduce those expenses.
In some cases, you can even eliminate expenses from your budget entirely. For instance, monthly subscriptions are expenses that often get overlooked and add up over time. A $100 USD monthly gym membership adds up to $1,200 USD a year, or a $20 USD monthly magazine subscription comes up to $240 USD a year. So, if you’re signed up to a gym you’ve stopped going to, or subscribed to an online magazine you don’t read anymore, cancelling those subscriptions frees up cash that can go towards your savings, or other bills in your monthly budget.
Make sure you have sufficient insurance coverage
As you review your finances, you should also go over your insurance policies. Major life-changing events, such as critical illness, accidents, or death, are unpleasant to think about, but they can put a financial strain on you or your loved ones if you’re not properly protected against them ahead of time. Having the right insurance ensures that you and your loved ones won’t have to worry about finances if anything were to happen to you.
That being said, managing your insurance is about striking a balance between having just enough coverage to pay for these large unforeseen expenses, but also not paying for more coverage than you need.
You need to consider a number of things to evaluate how much insurance you need. A simple rule of thumb would be to calculate your total annual income and multiply that by 10 or 15 years. There are other considerations you should account for when deciding how much coverage you need, such as whether or not you have a family. If you have a family who depends on you financially, you’ll need more insurance coverage compared to someone who is single. Your life circumstances could have also changed since you last bought your insurance, so take the time during your review to assess if you need more or different insurance coverage. Bought a home in the last 6 months? Make sure that you’ve also got home insurance to go along with it.
Our Academy course, Financial Plan B, can help you guide you to decide how much insurance you need based on your life circumstances.
Review your progress towards your financial goals
Evaluating your financial goals in relation to other aspects of your finances helps you identify ways to improve your progress towards your financial goals. For instance, if you’re not progressing quickly enough to your goals because you’re overspending on eating out at restaurants every month, you can make the changes necessary to put you back on track to reaching your goals.
However, you might be behind on your goals because you’re prioritising reducing your credit card debt, or topping up your emergency funds. In these cases, it makes more sense to reevaluate your goals to make sure that they’re realistic. You may want to extend the timeline of some of your financial goals to give yourself the time to build your emergency fund. It’s vital that you build a strong financial foundation first so that you can fully stay in control of your money in the long run.
Remember also that it’s okay to change your mind about a financial goal, especially if you’re making a major life decision. Reviewing your goals lets you adjust your financial plans should you decide to change your mind about buying a house, or even if you get an unexpected promotion.
As you’re living your life, it can be easy for you to veer off track from your financial plan. Checking in on your finances gives you a clearer picture of how you’re doing financially so that you can take action to make sure that your finances are always in order, no matter what’s going on in your life.
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