Note: Did you know that a recent study found that nearly 60% of Americans do not assess their financial health regularly? Annual estimates of financial health also show that a similar share of Americans are not Financially Healthy in any given year – between 66% and 72% from 2018 through 2022

In Part 2 of our Budgeting 101 series, we will delve into the crucial step of assessing your financial health. Understanding your current financial situation is key to creating an effective budget that aligns with your goals and helps you achieve financial success. By evaluating your income, expenses, and debt, you will gain valuable insights that will inform your budgeting decisions and set you on the path to a more secure financial future. Let’s dive in and explore the step-by-step process of assessing your financial health.

Gather your documents!

To begin assessing your financial health, it’s important to have a comprehensive view of your current financial situation. Gathering the following documents will provide you with a holistic understanding of your financial landscape.

Start by collecting your bank statements. These statements will reveal your income, expenses, and account balances over the past few months. By reviewing them, you can analyze your spending patterns and identify areas where you can make adjustments to improve your financial health.

Next, retrieve your credit card statements. These statements will provide insights into your credit card transactions, outstanding balances, and minimum payments. Understanding your credit card activity is also crucial for managing your debt and ensuring timely payments to avoid additional fees or interest charges.

If you have any outstanding loans, such as student loans, personal loans, auto loans, or mortgage loans, gather the relevant loan statements. These statements will provide information about your loan balances, interest rates, and minimum monthly payments. Evaluating your loan obligations helps you determine the impact of debt on your overall financial well-being.

Additionally, gather your investment statements to assess the current value of your investments. This includes statements related to stocks, bonds, mutual funds, or any other investment vehicles you hold. Understanding the performance of your investments can help you make informed decisions regarding your portfolio and long-term financial goals.

Don’t forget to gather your pay stubs or income statements. These documents provide a clear picture of your earnings from employment, including any additional sources of income, such as rental income or side gigs. Knowing your income sources is essential for budgeting and managing your cash flow effectively.

Compile your expense records, including receipts and invoices, to get a clear understanding of your fixed and variable expenses. This includes items like rent, utilities, groceries, transportation, entertainment, and other discretionary spending. Analyzing your expenses helps you identify areas where you can cut back and save money.

Finally, gather your retirement account statements, such as 401(k) or IRA statements. These statements outline your contributions, investment performance, and account balances. Reviewing your retirement account statements enables you to assess your progress towards your retirement goals and make any necessary adjustments to your retirement savings strategy.

By organizing and reviewing these documents, you’ll have a solid foundation for assessing your financial health. It will enable you to identify areas for improvement, make informed financial decisions, and take steps towards achieving your financial goals.

Step 1: Evaluate Your Current Financial Situation

1. Income Assessment: Determine your sources of income and calculate your total monthly or annual income. Include your salary, wages, rental income, side hustles, and any other sources of income. This step provides a clear picture of your earning potential and helps you establish a baseline for budgeting purposes.
2. Expense Evaluation: Next, analyze your expenses. Categorize your expenses into fixed and variable categories. Fixed expenses include items like rent or mortgage payments, utilities, insurance, and loan repayments. Variable expenses encompass discretionary spending, such as dining out, entertainment, and travel. Review your bank statements, receipts, and credit card statements to ensure all expenses are accounted for. This process allows you to identify areas where you may be overspending or where potential savings can be made.

Step 2: Determine Your Debt Situation

Managing debt is an integral part of assessing your financial health. By understanding your debt obligations, you can make informed decisions to reduce debt and free up more funds for savings and investments.

1. Compile Your Debt Information: List all your debts, including credit card balances, student loans, personal loans, auto loans, and any other outstanding debts. Include the current balances, interest rates, and minimum monthly payments for each debt.
2. Calculate Debt-to-Income Ratio: Calculate your debt-to-income ratio by dividing your total monthly debt payments by your monthly income. This ratio helps you assess the proportion of your income that goes towards debt repayment. Ideally, your debt-to-income ratio should be below 36%, but the lower, the better. If your ratio is too high, it may indicate a need to prioritize debt repayment in your budget.
3. Review Interest Rates: Examine the interest rates on your debts. High-interest debts, such as credit card balances, should be prioritized for repayment, as they can accumulate significant interest over time.

Assessing your financial health is a critical step towards building a solid foundation for effective budgeting. By evaluating your income, expenses, and debt, you gain a comprehensive understanding of your current financial situation. This knowledge empowers you to make informed decisions, prioritize areas for improvement, and create a budget that aligns with your financial goals. In the next part of our Budgeting 101 series, we will explore how to create a budget tailored to your needs and aspirations. Stay tuned as we continue this journey towards financial success!

Remember, assessing your financial health is an ongoing process. Regularly review and update your financial situation as your circumstances change. By staying vigilant and proactive, you will pave the way for a more secure and prosperous financial future.