The Personal Finance Check-Up

Posted by on May 5, 2008 in Misc.

When you get to a certain age, doctors recommend that you starting seeing them for an annual physical to assess your personal health. This is a very good suggestion but when was the last time you did a check-up on your personal finances? I am not talking about an annual visit with your investment advisor or your accountant to look at your portfolio or file your taxes but a true contextual look at your financial life. Doctors run a typical battery of tests at a physical: blood pressure, resting heart beat, blood tests etc. Here’s my equivalent of an annual physical on your personal finances. The key is to do it all at once so you can formulate a plan to make the appropriate adjustments if you are not financially healthy.

  1. Check your credit score. You do this for a couple of reasons: (i) to check the accuracy of your creditors reporting on you; (ii) to assess if there are any mistakes (very possible if you have a common name); and (iii) to determine if you have been a victim of identity theft (i.e. is there a credit card account open that you didn’t authorize?). Credit reports are free by law. Obtaining your credit score in Canada or obtaining a credit score in the United States is simple and easy. As a side-note, you should never directly or indirectly pay for your own credit score. A lot of privacy products now sell your credit score as an added bonus to their privacy protection products. You can obtain your credit score for free by doing it yourself. The “added bonus” feature is not a bonus at all; they are relying on you being lazy to move product.
  2. Track your budget or find out how much your fixed expenses are. The problem with budgets is that few people follow them. They are like new year’s resolutions. They are made and then forgotten about weeks later. Check how you are doing against your budget. If you are like me and hate budgeting then do what I do. I track what my fixed expenses are; I define fixed expenses as expenses you have to pay every month regardless of your circumstances which you need to survive. Thus, we are looking at items like rent/mortgage, car and life insurance, property taxes, day-care expenses, bank fees etc. If your fixed expenses are creeping up, find out why. It could be for perfectly legitimate reasons like you had another kid or not so legitimate reasons such as defining non-essential items as fixed expenses (your going out budget is not a fixed expenses; worse case scenario, you are broke, you stay home and watch t.v. or borrow a book from the library but seeing Iron Man is not a need in life).
  3. Check how much cash or credit sources you have available. The key question being do you have enough cash or credit to get you through bad times? The only way to do this is to look at your fixed expenses. Ideally, you take your fixed expenses and multiply by 3. If you have this amount of cash or credit available, then you should be fine since you have 3 months of expenses covered in a worse-case scenario.
  4. How is your portfolio doing? I am shocked when people don’t know approximately how much money they made or lost in their portfolio. You don’t have to be like us bloggers and know your net worth to the nanosecond. Pick a date every year, look at your portfolio from the same date last year and figure out how much you made. Can’t tell because you made contributions? Most institutions now do the math for you so request it (this also gives you an excuse to call your investment advisor and ask questions about what they did for you the previous year).
  5. How is your asset allocation? Asset allocation refers what you hold in your portfolio whether it is cash, bonds or stock. Asset allocation is a whole discussion in and of itself but keep this fact in mind: studies show that 85% of your portfolio’s return is determined by asset mix (see Kirzner and Croft, Protecting Your Nest Egg). Middle Class Millionaire previously wrote a very concise summary on asset allocation. Again, if you have an investment advisor, this is the perfect time to call them up and have a discussion on where your portfolio is going.
  6. Are you paying too much tax? The blogging world has a mantra that if you get a tax refund, you paid too much tax since a tax refund is really an interest-free loan to the government. I agree and disagree with this viewpoint (I didn’t have time to address this topic this year) but the larger question to me is do your tax returns show you are consistently receiving a refund of approximately the same amount? If you are, you would make better use of your time not complaining about the inherit unfairness of the tax system but doing sometime about your own situation (again, don’t file your taxes and put them away- look at them carefully and compare it against previous years). If you are receiving a refund year over year in the same amount, adjust your with-holding tax. Go to HR and tell them you want to with-hold less tax in the amount of your refund (for a more detailed how to in Canada, see comment 6 in Canadian Capitalist’s post about taxes refunds).
  7. Update your resume. I am not sure I have to elaborate on this point but the more we do the less details we remember so update your resume even if you are not looking for a job. A resume is like a line of credit; have it ready before you need it.
  8. Review how much passive income you are making annually. Tina Fey’s character in 30 Rock once said something funny to her boss (who, I gather, is super rich in the show) which sticks in my head even though I don’t watch the show- to paraphrase: “I need you to show me that thing that rich people do where they take money and make more money with it…” That’s how passive income is produced in a nut-shell. The more you have, the less you have to worry so start tracking how much interest, dividend, rental and other income you are making and then figure out ways to make money off your money.
  9. Is it time to find new advisors? I have a post on this topic this week but too many people stick with advisors they don’t like/are not good fits because when they need an advisor, they don’t have any time to look for new ones. Take time to figure out whether your advisors are doing what they are supposed to well before you need to call them.
  10. Are you getting where you want to go in life? If not, why not? The often quoted definition of insanity is doing the same thing and expecting different results. Are you getting closer to your goals? If not, what changes can you make to help you along because if you are going side-ways or backwards clearly what you are doing is not working.

I picked July 1 as my check-up date because my taxes are filed, half the year is over (meaning there’s enough time in the rest of year to make adjustments) and things begin to slow down come summer.

Did I miss anything in the check-up? If so, please share. Thanks.

6 Comments on The Personal Finance Check-Up

By Kelsi on May 5, 2008 at 6:01 pm

Hi there – love your site, I actually check it every morning.

RE: getting your credit score. Every Canadian is entitled to a free credit ‘report’ once a year, if they mail in the application to Equifax or Transunion. But a credit ‘report’ is different than a credit ‘score’. How do you go about getting a free credit score?

I’m cheap and would love to get my score without paying, or losing points.


By Canadian Capitalist on May 5, 2008 at 10:08 pm

Thanks for the link. I think the list is pretty comprehensive. I track our net worth on an annual basis as well just to keep track of how we are doing.

By admin on May 5, 2008 at 11:35 pm

Kelsi: Let me look it up. Good pick-up. Thanks.

By This and That on May 8, 2008 at 11:10 pm

[...] The Personal Finance Check-Up list from Thicken My Wallet blog. [...]

By Riscario Insider on May 11, 2008 at 9:59 pm

Terrific suggestions. When put together, the list looks daunting :(

Related to #7 (update your resume) and #10 (progress towards your life goals) is improving yourself — ideally in a marketable area. Investing in yourself gives you something new to add to your resume and helps you overcome inertia that gets in the way of our life goals.

Like Kelsi, I’m interested in a source for credit scores (ideally free).

By Weekend Roundup~The Wellness Edition | On a Quest To Be Debt Free... on October 4, 2008 at 7:14 am

[...] My Wallet wrote, “The Personal Finance Check-Up“~When you get to a certain age, doctors recommend that you starting seeing them for an annual [...]

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