It's time to give yourself a money checkup.
You see your doctor at least once a year, take your car to the mechanic, set a reminder to spring-clean the house. So why not give your financial health the same annual attention? “Digging through your numbers isn’t an exercise in judgment—it’s a way to make sure there are no surprises and to set intentions for the future,” says Manisha Thakor, founder of MoneyZen Financial Education in Portland, Oregon, and coauthor of Get Financially Naked. Here’s how to assess your financial situation so you’ll be able to see which areas are going strong—and which might need some TLC.
Know the Number: Net worth is the value of all assets, minus the total of all liabilities. Or, put in plain speak, it’s what you own minus what you owe. “That gives you an immediate sense of whether the money coming in is being translated into wealth you can use later,” says Thakor. Tally up your assets first: How much do you have in your bank accounts? What’s the current balance on your retirement and investment portfolios? How much would your home fetch if you put it on the market tomorrow? Do you own anything else—a boat, a vacation home, a set of Fabergé eggs—worth including? Then tally up the things you owe, like your mortgage, student loans, credit card debts and auto loan. That first total minus the second equals your net worth.
What to Do Next: “You’re checking for two things with net worth: that it’s not negative and that it’s trending upward,” says Thakor. If you’ve never calculated your net worth before, think of this as your benchmark. Wealth doesn’t have to grow in a perfectly straight line—maybe one year the real estate market dips or your stock portfolio stumbles—but you want to do everything you can to nudge this number higher. Of course, if your salary and spending are in lock-step, your net worth can’t rise much. To get things growing, you can either get more money (land a giant windfall, command a pay raise, start a side hustle) or hold onto more of what you make (through savings or investing). Or—ideally—do both!
Know Your Number: You know your salary, but how much do you actually bring home? “People aren’t intimate with that number and tend to overestimate how much they make after taxes,” says Rachel Rabinovich, director of financial planning at the Society of Grownups, a finance-education group in Brookline, Massachusetts. Peek at your payslip and note the frequency. Biweekly means you get 26 checks a year; bimonthly means just 24.
What to Do Next: Now that you know how much you take home, make sure you use that money to support your goals. Thakor is a fan of the 50-30-20 rule: Half your take-home pay should go toward needs, 30 percent toward wants, and 20 percent toward savings and debt repayment. “Most people are far below with savings and far above with wants,” she says, so don’t panic if your budget seems out of whack. But any progress you can make is worth it.
Know Your Number: Three main credit bureaus—Experian, TransUnion, and Equifax—maintain your history, which financial-analysis firms like FICO and Vantage use to crunch your score. Get your score through Experian at freecreditscore.com or discover.com (even if you’re not a Discover cardholder).
What to Do Next: Go to annualcreditreport.com for free credit reports from all three bureaus. You’ll find details on anything that might be dragging down your score. Check for errors—according to the Federal Trade Commission, one in five disputed reports contains one, and while most are minor flubs (like incorrect addresses), 20 percent of identified errors are big enough to lift a score once corrected. If your report is error-free, know that the surest ways to buoy your score are to pay bills on time and whittle down your debt.
Know Your Number: If you bought your home with an adjustable-rate mortgage, the interest rate will change annually after the initial set period of three, five, or seven years. Whether it jumps or slumps is beyond your control, but you’ll want to be prepared if you’re staring down an increase. “Make sure your rate is competitive, even if you have a fixed-rate mortgage,” says Thakor.
What to Do Next: Refinancing is all about running the numbers to figure out whether the monthly savings of a lower mortgage is worth the paperwork and loan fees. Bankrate offers a comprehensive online calculator. If refinancing seems to make financial sense, talk to your mortgage lender or compare offers from the bumper crop of online sites (Lenda, Better Mortgage, SoFi, and Quicken).
Know Your Number: Your savings should mimic your financial goals, spanning both the short and long term. To see if that’s true, check the balances on your emergency savings and retirement portfolio.
What to Do Next: Depending on your financial situation, three to six months of living expenses is the goal for rainy-day savings, but that amount may seem lofty for most, says Rabinovich. To move toward it, tally nonnegotiable expenses. (Mortgage, groceries, insurance? Yes. Clothes, travel, entertainment? Nope.) That number reflects your vital living expenses, and socking away even a month’s worth will give peace of mind. As for retirement, saving 15 percent of your salary is ideal. If you aren’t there, consider bumping your contribution by just 1 percent. It won’t feel like much now, but it will add up later.
Credit Card Interest Rates
Know Your Number: The average American household with credit card debt has a balance of $16,748, per NerdWallet’s latest annual survey. Take stock of your IOUs: Log on to each credit company site and rank your interest rates from highest to lowest.
What to Do Next: Finance pros might hem and haw about when and whether it makes sense to pay off your mortgage or student loans early, but nearly everyone agrees that credit card debt is a hair-on-fire type of priority. Make at least the minimum payments on all your accounts and throw any extra money toward the card with the steepest interest rate. Once that card is paid off, focus on the next-highest rate. And the minute you’re finally out of debt, shift that monthly outlay to savings, says Thakor. You won’t feel a difference in your budget, but you will feel it in your net worth.