Million Dollar Journey

Building Wealth through Saving and Investing

Give Yourself a Financial Checkup

This article was originally written in Sept 2008, but very relevant for today. I enjoyed reading over it again, I hope you do too!

Life is busy. However, even with hectic schedules most of us manage to keep up with the family, home maintenance, exercise, and work. But what about your finances? When was the last time you sat down and gave yourself a financial checkup?

This article will check over various areas of personal finance and guide you along the way. The topics include, cash flow, net worth, insurance, debt, investments, credit scores, cash reserves and estate planning.

Check your cash flow

Open your favorite spreadsheet program (or other money management software). In one column include all of your sources and income and the amount. In another column, calculate all of your expenses including automatic savings and retirement contributions. The difference between the first column and second column should be in the positive territory. If not, review your expenses and cut out the fat. Then look over your income sources and find additional ways to make more money. One of my favorite frugal tips is to write it down.

Check your net worth

Some people don’t believe in using net worth as a metric for personal wealth. As you probably know already, I’m a big fan of the net worth statement. It gives you the “big picture” of where you stand with regards to your financial health. Increasing net worth can be achieved in 3 ways. Reduce debt/liabilities, increase assets, or do both at the same time.

It’s fairly simple to check your net worth. Add all your assets and subtract your liabilities. For an example, you can refer to my net worth updates that I make public. Regularly updating your net worth can help keep you on track to meet your financial goals.

Cash Reserve

Do you have a cash reserve? You should have enough to cover the worst case scenario. Some may believe that having a line of credit is enough. That is fine and dandy for those with good cash flow (see above), but those with limited or no cash flow really should have an emergency fund.

For example, if the worst case scenario is losing your job (with no severance package), then you should have enough cash to pay for expenses while waiting for EI benefits. Or what if you had an insurance claim? Do you have enough cash to cover the deductible?

One prime example of where a cash reserve comes in handy is if you’re self employed. Do you have enough cash to cover expenses when revenues are lower than usual? If I was 100% self employed, I would be socking away cash when money is plentiful as a cushion for when times get rough.

Credit Score

Get your credit report and check your credit score regularly. The biggest reason for this is to make sure that there aren’t any mistakes on your credit report which could pop up at the worst times. For example, during a mortgage application.

Credit reports can be obtained for free, but obtaining your credit score usually has a small fee associated with it. If you currently have spotty credit, check out my article on how to improve your credit score.

Insurance

Insurance is one of the more overlooked area of personal finance, but it is vital that you have proper insurance to protect your dependents from financial disaster. If your (or your spouses) income is cut off due to death or disability, will your family financially survive?

Start with your term life needs (renewable and convertible) to protect your family in case of death. Then do your research on own occupation disability insurance to protect your main income in the case that you are disabled and unable to perform your job duties.

Investments

How are your investments doing this year? Yes, the markets may be down but that’s not a reason to ignore your portfolio. Are you following your strategy? How about your retirement accounts? Have you made your contributions yet?

If you’re invested for the long term with a diversified portfolio, the best advice would be to sit back and relax, the storm will be over soon. In the long run, market volatility is simply a blip on the map. In fact, if you have the discipline, the best time to add to a diversified index portfolio is when the market corrects.

Debt

Time to review the dreaded debt on the balance sheet. As I’ve written before, I believe that there is good debt and bad debt. The good being money borrowed for an appreciating asset and is tax deductible. Bad debt is the opposite. This debt is typically credit card debt used to buy depreciating consumer items.

Take the time to prioritize your debt and focus on paying it down one at a time. If we can pay off $50k worth of consumer debt in 3.5 years, anyone can.

Estate Planning

Along with sorting out your insurance as explained above, there are other factors of estate planning that need to be accounted for. Do you have a will? Do you know how you will pass your house/cottage or portfolio onto your children with minimal taxes? Or how you want your assets split between children? Did you know that if you don’t have a will that the courts decide how your assets are divided?

Contact a lawyer that specializes in estate planning and get your affairs in order. From my research, a will should cost around $400. Check out a previous article on the basics of wills and estate planning for more detailed information.







24 Comments, Comment or Ping

  1. Great article, wrote something similar a few weeks ago. I missed out on the insurance and estate planning aspect of financial health, great stuff!

  2. 2. Mr.Archanfel

    I don’t get the part about insurances. I have already thought insurance the same as buying lotto tickets. Both seek a vast amount of money through a tiny chance. Both has a negative return rate. Mathematically, they are exactly the same. If something does happen, some investment can always be liquidated. Sure, a bear market would mean maybe 20% losses on the withdraw amount, but wouldn’t that still be cheaper than buying insurance?

    I am also not sure about buying “when the market corrects”. The problem is one never knows which phase the market is in. Nasdaq still haven’t recovered from the last crash. I think for average long term investors, the easiest thing is still to stick to your plan through dollar average. I mean I am sure technical analysis works, but 90% of people probably do not have the skill to do it.

  3. Mr. Archanfel, with regards to insurance, the money covers what your dependents would require to financially survive. If you have enough in your portfolio, then great, you are self insured. But if you’re like most North Americans out there, then not getting life/income insurance is a large financial risk IMO.

  4. I also don’t buy into the whole insurance thing myself, but could see it as a good idea if you are the sole breadwinner in the family or if you make more money than your spouse. Other than that life insurance is good.. for insurance companies shareholders.

  5. 5. DAvid

    Re: Cash Flow

    There are a number of Personal Budget Templates on the ‘net which have income & expenses categorized. I found this helpful to capture more of my expenses, especially those annual ones, that I might forget about!

    DAvid

  6. 6. The Rat

    Regarding the credit score ( I also read the link to Tips on improving it), I definitely agree that there are some obvious pitfalls out there to avoid, as well as ensuring the information on your credit check is accurate (such as employer infomation, etc). However, I have personally come to realize that there are a lot of complex and not entirely transparent factors that play a role in one’s credit score, or, more importantly – being granted additional credit. My thoughts only. I just think that credit lending institutions have their own formulas they use and review individuals on a case-by-case basis quite often.

  7. I’ll disagree with Mr.Archanfel and DGI on the insurance part- I definitely get it for family breadwinners.

    The purpose of term life isn’t to provide a windfall, it’s to ensure that those left behind can continue to enjoy a similar standard of living. Most families live a lifestyle based on certain income expectations, and the sudden loss of a breadwinner could mean that their lifestyle would no longer be sustainable. While investments can be liquidated, this means that they can no longer be used for their original purpose, whether that is retirement, education, financial independence, etc.

    The same can be said for disability insurance- would you really want to find yourself disabled for a period and have to deplete your retirement savings to pay for daily living expenses, and then have to try to rebuild your funds if/when you return to work?

    Term life and disability are generally inexpensive and I find the premiums well worth the piece of mind they provide.

  8. DAvid, I’ve tried few times with budget but it never works … On the other hand Expense monitoring and Net Worth check every month is something you can do for sure and works great mixed with Automatic investment programs.

    MDJ, When you say “Get your credit report and check your credit score regularly.” what exactly is regularly? Most experts advise once a year …

  9. 9. Chuck

    @multifoldreams
    - checking your own credit is also considered a hit on your credit bureau score. So 1x per year should suffice. I don’t know if its available in Canada, but one of my friends in the US pays a fee to know be informed via email whenever someone is checking his credit score. He used to be a victim of credit fraud and found it gave him peace of mind.

    @MGL
    totally agree with you. In my dad’s case his father passed away without insurance leaving my father the head of household at the age of 14. A lot of his life was put on hold helping provide for and raise his younger siblings. I sometimes get a feeling he dislikes the youngest for that reason.

  10. Chuck, I did it this year, and it was pretty short and boring reading.
    I was also disappointing to see that there was no credit rating – wrong expectations I guess for a free report.

  11. Good list!

    For me my top priority is first achieving my emergency fund. Once I’m done with it, then I can start with the other items.

    Having an emergency fund will protect you from unpredictable events in your life. Plus the piece of mind having known that you have such fund is ideal.

  12. 12. RJ

    I don’t think Mr.Archanfel really understands insurance……if you depend on ur investments for insurance needs your financial plan has a SERIOUS flaw
    1. you don’t know when it will happen, how much you’ll need. Yes it could b during bad times, but also potential tax liabilities.
    2. Your investment plan is for a specific purpose (MDJ to become a millionaire before 35) if you use it as insurance you will destroy the whole plan and may never reach your goal.
    3. Insurance is TAX FREE MONEY……

    No matter how big your investment portfolios you will always have a need for insurance. Sometimes people don’t understand it fully, it is used as a MAJOR tax relief by wealthy people.

    The two largest policies are owned by the two richest men in the world Bill Gates and Warrent Buffet. They are worth over $60 Billion each I am sure they have enough money to consider themselves self-insured but they understand insurance.

  13. Chuck, CIBC has a free program that is offered with their credit products that notifies you every time that your credit is “pinged”.

    RJ, i’m with you. Insurance is not about winning the lottery, it’s about protecting dependants.

  14. Lawyer, why are you disagreeing with me. I said “I also don’t buy into the whole insurance thing myself,”

    and then added

    ” but could see it as a good idea if you are the sole breadwinner in the family or if you make more money than your spouse. ”

    Other than that my point is still “that life insurance is good.. for insurance companies shareholders.”

  15. 15. LL

    FT – How would you prioritize these items? In particular… would you pay down the “bad” debt before creating an emergency fund? And what about adding to investments – where does that fit in priorities over paying down debt?

  16. Hi LL, great question. The priority depends on your situation. If you have children, then getting a will and life insurance may be top priority. For for generic priority, I would establish positive cash flow first ie. spending less than you earn, pay down debt, then invest.

  17. LL, I would add that once you establish positive cash flow, try to set some money for emergency fund, before attacking debt as you do not want to face another financial difficulty sink back in the debt.
    The investming should come after you win your fight with your bad debt as it is unlikely that you will be able to have higher ROI than the interest you are paying with aftertax dollars.

  18. 18. Cannon_fodder

    DGI,

    “I also don’t buy into the whole insurance thing myself,”

    I took that to mean you were talking about whole life insurance. Are you saying that you don’t buy into any type of insurance, or just life insurance, except for instances where you make disparately more than your spouse?

  19. Great checklist. This is a wake up call for people who spend more time researching a flat screen TV than getting a grip on things like these, that have a real impact in our life and future.

  20. 20. Tim Landry

    I would DEFINITELY put disability insurance in front of even term life insurance for at least two reasons. Your chances of being disabled at a young age are FAR GREATER than dying – remember the old truth. 3% of mortgage foreclosures are due to death and 48% are due to disability – 16 to 1 says STRONGLY – buy DI first. Secondly if a person dies it may be devastating emotionally but the financial impact while severe comes nowhere close to that of a disability.

    PS – what you are really referring to is what the industry calls “regular occupation”. “Own Occupation” is designed for highly specialized occupations

  21. This is a great list and I agree that having an emergency fund should be the main priority. It is vital to have some sort of back-up fund to help you in times of need or during an unexpected event.

  22. 22. InsureCan

    Mr. Archangel is entirely correct. The mathematics of lotteries and insurance is identical.

    The difference is in the purpose. Lotteries are an attempt to create wealth where none was before. Insurance is an attempt to protect a specific financial loss.

    If you die,and don’t see any financial loss, then yup, insurance is a lottery.

    Except for many of us with dependents, the financial loss at our death is our income. the insurance benefit at that time isn’t a creation of wealth out of nowhere, it’s simply replacing the lost income, the paycheque that disappeared at our death – ideally dollar for dollar.

  23. 23. SST

    I would argue that lotteries are a redistribution of wealth opposed to a “creation of wealth”. The wealth is already there, in the pockets of the many ticket purchasers. It then travels to a single source and from there is distributed to a very few.

    As for insurance, the “lottery” is not in protecting a specific financial loss — if an insurance-triggering event occurs, then financial loss will not be incurred. The “lottery” is the event itself — eg. what are the chances of your house burning down? Insurance is more akin to lottery hedging.

  24. Definitely among your pillar articles as the advice is timeless.

    Like you, I’m a massive fan of the net worth statement. Every month, I religiously complete a monthly investment income spreadsheet along with a net worth statement. I actually can’t stand the idea of falling behind on these crucial exercises in the run of a month and I get crankier by the day upon the arrival of a new month until they have been completed.

    I think the last point you mention regarding estate planning is often overlooked by many. Although drafting wills and planning for the management of your assets upon death can sometimes be less exciting than watching paint dry, it doesn’t mean it’s not important.

    Boomer & Echo posted an article earlier this week mentioning how 50% of people die without having an estate plan in place. That’s a huge number IMO.

    Great post.

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