A lot of people like to think they’re managing their money pretty well. But Solos Advisor knows that if you haven’t assessed your financial wellness, there’s no way to know for sure!
Learn how to assess your financial wellness with this easy 6-step plan.
Table of Contents
Step 1: Get an idea of where you are
Calculate your net worth. This is also known as your balance sheet. The formula for calculating net worth is: Assets – Liabilities = Net Worth or (Your Assets – What You Owe) = Net Worth.
It’s a simple calculation but one that can reveal insight into where you are financially, and an excellent starting point for understanding how to assess your financial wellness.
Step 2: List out all your expenses
When you’re starting to assess your financial wellness, it’s important to take a step back and take stock of your situation.
Now is the time to list out all your expenses.
Be as detailed as possible here, writing down every category you can think of. Include rent/mortgage payments and car payments as individual categories; they will help you to see how much money is left over after each payment is made.
You need to list all your expenses over a one-month period. They could be big (mortgage payments) or small (subscriptions), but they should all go on your sheet. When you have them down, you can use that information as a reference point for future planning.
Step 3: List out all your income sources
It’s important to list out all of your income sources so you can see how much you have available. While, yes, it’s good to look at your overall budget for monthly expenses, listing out where your income comes from also helps with financial wellness because it lets you easily recognize areas of waste.
Plus, listing these sources out can reveal if any of your income is less than ethical. In fact, if you are struggling financially, making a list of your income sources could be a great first step toward helping you dig yourself out of debt.
Step 4: Calculate savings rate
The next step to achieving financial wellness is understanding your current financial picture. For many, that means calculating your savings rate, which is how much you save on your monthly income. Take the total amount you earned last month and divide it by what you spent over that period.
If you’re saving at least 10 percent of your salary each month, pat yourself on the back. If not, make a plan to get there ASAP—the earlier you start saving, after all, is better than the later when retirement approaches.
Calculating your savings rate gives you an idea of where you stand financially. It allows you to see how much money is going toward things like paying off debt or building up an emergency fund vs. spending it frivolously on things like new clothes or nights out with friends.
Step 5: Compare the present state with the ideal state
If you’re not sure where you stand financially, that’s a good place to start. Begin by taking an honest look at your financial state today and comparing it to your ideal financial state.
Having a picture of where you are now will be helpful in setting future goals.
If you don’t already have one, establish your ideal financial state by thinking about what kind of lifestyle (in terms of security, freedom, and so on) makes sense for you.
This might be harder than it sounds. Try asking friends and family members if they could live with your current spending patterns. Hopefully, they’ll be supportive—if not, start chipping away at their resistance instead!
Step 6: Set goals for the future
Before you can create a plan to get out of debt or save for retirement, you have to understand your current financial situation. That’s why it’s important to take an honest look at your financial health. It’s difficult to fix what you don’t know is broken, after all.
Once you’ve assessed your current financial wellness and decided where improvements are needed, it’s time to set goals for the future.
The two most important questions to ask yourself before setting any goals are: What do I want to achieve and when do I want to achieve it by? The sooner the better! But without goals (and realistic ones), it can be hard if not impossible—to establish a plan that will help you make your dreams reality.
Final Thoughts
To assess your financial wellness, it’s necessary to take stock of your money situation. This means assessing your emotional state, family and partner relationships, income, expenses, and savings rate.
It’s a holistic approach that may seem overwhelming—in reality, though, you don’t need to do everything at once. Instead of trying to solve all of your problems in one sitting, start with one aspect of your life.
For example: If you feel like you have no extra cash on hand after covering your bills and are overspending on credit cards or making late payments each month as a result of being overdrawn—that is a financial problem that needs attention.
