Just as it’s prudent to do an annual exam for your health, routine maintenance on your cars, and periodic repairs on your home, it’s also critical to follow a financial wellness checklist regularly for your financial health. 

In order to make sure you’re on the right path, you need to know where you’ve been and where you’re going. That’s what a financial wellness checklist can do for you. You can do it quarterly, biannually, or annually, but whatever you do, don’t skip it.

I like to check my financial wellness annually and typically do it in January each year. Whatever frequency works best for you, I’d highly recommend you incorporate the following items to keep your finances in tip-top shape.

Where to Begin With Your Financial Wellness Checklist

As you read through this helpful guide we will teach you how to interpret your current financial well-being and evaluate what you need to do to improve it for your financial future. Below are a few quick questions to think about for your financial plan. 

Spending & Budgeting

  • Do I spend more money than I make?
  • Do I have a monthly budget?
  • Do I pay off my credit card balance every month?
  • Do I have an emergency savings fund to cover at least 6 months’ expenses?
  • Do I have a plan to reduce spending and/or increase my income this year?

Debt & Credit

  • Do I have any debt (credit cards, student loans, mortgages, car loans, etc.)?
  • What are the interest rates of my debt?
  • Are any of my loans high-interest, such as credit card debt?
  • Do I have a plan for paying off the debt?
  • Do I regularly check my credit report? 
  • What is my credit score?
  • Do I need to improve my credit score for a large future purchase?

Retirement & Investments

  • What is my net worth?
  • How much money do I have in my retirement savings? 
  • What percent of my income am I saving for retirement?
  • Am I using my retirement accounts effectively (401 K, Roth/Traditional/SEP IRA, etc.)?
  • Do I have a diversified investment portfolio that matches my long-term financial goals?
  • Do I need to reevaluate my investment allocation or rebalance my portfolio?
  • Have I calculated how much money I need to retire?
  • Do I have a plan to reduce my tax burden now and in the future?
  • Do I have life insurance and a will to manage my estate?

In addition to thinking about these questions, it is important to track your personal finances, just like you would track the financials of a business. 

For a snapshot in time, I like to begin with a personal financial statement which includes your balance sheet, your cash flow statement, and your calculation of net worth. 

If you’d like to learn more about how to create a personal balance sheet and calculate your net worth click here

These should be tabulated regularly and saved for comparison over time. Assets and expenses can fluctuate with time, but the long-term direction tells you whether you’re expanding, declining, or treading water in terms of portfolio health.

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Personal Balance Sheet

A personal balance sheet is a spreadsheet that contains your assets and liabilities. It tells you what you currently owe and own. And once you have an all-encompassing list, you can subtract your liabilities from your assets to arrive at your net worth. 

Is that number going up, down, or staying stagnant? Obviously, the goal is to increase your net worth. And adding assets and paying off expenses either separately or in tandem will raise your net worth.

Personal Cash Flow Statement

If your net worth isn’t what you want it to be, then the next step in a financial health check is to look at your personal cash flow statement. How does your monthly income compare to your monthly payments?

A personal cash flow statement measures your inflows and outflows of cash to determine your net cash flow. For most people, their inflow of cash will be the salary they earn from their job.

But some people, like real estate investors, will have developed passive income from their investments which should also be included in their calculation. 

Once you have listed all your cash inflow sources, you can move on to listing all of your cash outflows. Be sure to include your discretionary spending along with spending on necessities and debts. This will show you where your money is going. 

Now you can calculate your net cash flow. All you have to do is subtract your total expenditures from your total income. 

If you’re cash flow positive, congratulations. But if you’re cash flow negative, that needs to be rectified as soon as possible. You can’t get ahead financially by spending more money than you make.

Maintaining a Budget

If you’re cash flow positive and saving and investing more than 20% of your income, you’re doing great. Keep doing what you’re doing and feel free to skip to the next section. 

For those who aren’t in that situation, do not despair. Creating and maintaining a budget can get you where you need to be. Budgets allow you to track and plan your spending so that you can reach your financial goals. 

A useful rule for creating a budget is the 50/30/20 Rule

This general rule says that 50% of your spending should go towards necessities like food, shelter, transportation, phone service, and other living expenses. No more than 30% should go toward wants or discretionary spending like dinners out, entertainment, travel, and others. 

The 20% is the most important. That is the minimum target one should have for investing and saving.

Lowering Expenses

Getting to a savings rate of 20% or more is a good idea, but it may also seem impossible if you’re starting out cash flow negative. 

If you google how to get out of debt, you will encounter a whole host of recommendations. Some are more drastic than others, so you’ll need to make informed decisions on what is feasible for your financial situation. But if you attack your debt aggressively, many of the sacrifices you will have to make will be temporary. 

Raising Your Income

Reducing your expenses isn’t the only way you can get your cash flow statement in line. Another way is to increase your income. You can do that by optimizing your existing income (asking for a raise or working overtime) or adding additional sources of income (starting a side hustle or creating passive income).

If you’re going to ask for a raise, be sure to do your homework first. Business News Daily has some good advice to consider before asking for that raise. 

Securing a second job or a side hustle might be right for you. Decide whether this is something you want to do permanently or just until you can pay off your debts and save 20% or more of your income. 

Keep in mind that the cost of working more is time and your time is nonrenewable. For that reason, many astute investors choose to create passive income from real estate investing. I’ll discuss this further in an upcoming section.

Emergency Fund

If you have a positive savings rate, whether it’s 20% of your income or not, your first priority should be to start an emergency savings fund. Most experts recommend having anywhere from three to nine months worth of expenses in a savings account. 

These funds are intended to handle large unexpected expenses, life events, or job loss. 

How much you should set aside is dependent on a myriad of factors. A couple of things to consider are your job security and how much demand there is for the kind of work you do. Additionally, do you have other sources of income from a spouse or investments? 

Once you consider those factors, you can determine how much money you need to set aside for a rainy day.

Review Your Investments

Once you’re on track with your emergency fund, it’s time to look at your investment accounts. In this category, let’s start your financial wellness checklist with your retirement accounts.

Have You Maxed Out Your Retirement Accounts?

Decades ago, pension plans funded workers’ retirements. The plan was to work decades for a company and then the company takes care of you in retirement. Hard work and loyalty were rewarded for private sector workers.

Unfortunately, pension plans have been in decline for decades and today are more likely to exist in the public sector rather than the private sector. Instead, most workers are left with defined-contribution plans in which the worker funds the bulk of their retirement. 

These retirement plans can be employee sponsored like a 401(k), a 403(b), and a 457 plan. Non-employee-sponsored plans are known as individual plans and are referred to as IRAs. Common IRAs are traditional IRAs, Roth IRAs, and SEP IRAs. 

In general, financial advisors recommend maxing out your retirement investment accounts annually. That advice may not be universally true, but for many workers, it is sound advice. 

The advantages of retirement accounts are tax-free contributions and the possibility of employer match programs.

Should You Rebalance Your Portfolio?

Since diversification is so important, hopefully, you have a mix of investment types. The big three of investment classes are stocks, bonds, and real estate. And the question isn’t should you own all three as much as it is how much of each should you own?

So it really comes down to asset allocation. Your risk tolerance, time horizon, and investment goals along with other factors will determine if you will allocate aggressively, moderately, or conservatively.

Once you’ve determined the appropriate percentage of your portfolio you will hold in each category, the inevitable truth is that over time those assets will drift away from your targets. This is where rebalancing comes in. 

Rebalancing is when you periodically return your portfolio back toward your intended targets. You can do this by selling some of your better-performing assets and buying more of the underperforming ones. Or you can simply place new money in the underperforming asset class. 

Rebalancing Example

To better understand rebalancing, let’s look at an example. Suppose your ideal asset allocation is 40% stocks, 20% bonds, and 40% commercial real estate. But over time, your real estate and stocks overperform while the bonds underperform. Now your portfolio sits at 45% stocks, 10% bonds, and 45% commercial real estate.

In this scenario, some would advise selling 5% of the stocks and putting it toward bonds. Since commercial real estate is an illiquid asset class, you’ll need to wait for a liquidity event before you can rebalance.

When Should You Rebalance

As your portfolio mix deviates from its targets, the obvious question is when should you rebalance? Vanguard, the world’s largest provider of mutual funds, recommends checking your asset allocation every six months and making adjustments if it’s shifted five percentage points or more from its target. 

Others recommend rebalancing on a time schedule like once a year. Whatever you decide, be mindful of fees, commissions, and taxes when you rebalance. Utilizing tax-loss harvesting can be useful to offset the taxes incurred from rebalancing. 

Taxes Must Be on Your Financial Wellness Checklist

The biggest expense for most accredited investors is taxes. Taxes can carpet-bomb the financial fortunes of high-earning individuals. Therefore, special consideration should be given to your taxes.

As burdensome as taxes can be, what some people don’t realize is that they don’t have to be. Just as taxes can make you poorer, they can also make you richer. The choice is yours. 

That’s because the tax code is full of incentives that can put money in your pocket. The government subsidizes behavior they want more of and taxes behavior they want less of. Those subsidies and taxes are all written in black and white in the tax code. 

Tax Strategist

If your tax bill is higher than you think it should be, you probably aren’t using the tax code to your advantage. Perhaps you should consider hiring a tax strategist. 

A tax strategist is someone who can comb through your taxes and recommend ways in which you can utilize the tax code to lower your tax burden. 

It’s important to understand that a tax strategist is different from a tax preparer. And not all CPAs are tax strategists. You want someone with extensive knowledge of the tax code who will work with you to legally lower your tax burden.

Commercial Real Estate

If you’re working with a good tax strategist, then you’re likely to get a recommendation to invest in real estate. The reason is that the government highly incentivizes real estate investing. And millions of people benefit from the tax advantages and wealth-generating power of real estate.

You can read more about those benefits and watch our webinar dedicated to this subject at the links below:

Using Rental Property Depreciation to Reduce Your Tax Burden

Bonus Depreciation – Dramatically Cut Your Taxes with Real Estate

7 Tax Incentives For Apartment Investors

Apartment Investing Tax Advantages for Passive Investors

How to Use 1031 Exchange When Investing in Commercial Multifamily Properties

The 37th Parallel Properties Advantage

If you don’t have commercial multifamily real estate in your portfolio, the question is why? The research is clear. Over the last 20 years, real estate has outperformed the major stock and bond indexes.

Over that time period, adding commercial multifamily real estate to a stock-bond portfolio enhanced returns while decreasing volatility and increasing stability.

Combining a superior asset class with a superior operator makes good sense. Since 2008, 37th Parallel Properties have been multifamily specialists acquiring more than $1 billion in transaction volume while maintaining a 100% profitable track record. 

If you’d like to learn more about the 37th Parallel advantage, I encourage you to schedule a no-obligation introductory call to see if our investments might be right for you.

Financial Wellness Checklist, Your Financial Wellness Checklist – A Simple Guide