With a personal financial analysis, you’ll gain insight into your finances. It’s a comprehensive overview of the state of your financial situation. The analysis includes assessing your assets, liabilities, credit, income, and expenses.
Many people create a budget or set financial goals without first understanding where they stand financially today. To be successful, you’ll need to determine your starting point and calculate real financial numbers. This will help you set better goals and a more effective budget.
Let’s get started with my 7 steps to successfully complete a personal financial analysis
Step 1: Calculate your net worth
Net worth is the value of your assets, minus the total of your liabilities. If your net worth is positive, it means you have enough assets to cover your liabilities. Learn how to calculate your net worth >>>
Step 2: Determine your liquidity and identify your liquid assets
Liquidity is a cash asset or assets that can easily be converted into cash. For example, a savings account is more liquid than a home. Knowing how liquid your assets are can help you access cash to cover expenses or when income decreases. Learn more about liquidity >>>
Step 3: Prioritize your liabilities
Liabilities include all your debts and monies owed. For example, your home can be an asset but the mortgage is a liability. The value of that asset is reduced with the mortgage balance. List your liabilities from most essential (mortgage) to discretionary (credit card debt).
Step 4: Calculate your monthly income
Your income includes money you earn and make or receive from any type of activity. List all your income sources such as a paycheck, part-time work, side gig, interest earned, dividends received, royalties, alimony, etc. Learn more on how to calculate your total income >>>
Step 5: Calculate your debt-to-income ratio
The debt-to-income ratio is the amount of debt compared to your overall income. Lenders use this ratio when determining whether to lend you money. A low debt-to-income ratio is more desirable. Keeping your debt at a manageable level is one of the foundations of financial wellbeing. Learn how to calculate your debt-to-income ratio >>>
Step 6: Calculate your monthly cash flow
Cash flow is a measure of the money you receive and spend. Calculating your cash flow involves understanding where your money comes from and where it goes. If your net cash flow is positive, then you have extra money to put towards your financial goals. If your net cash flow is negative, it may be time to cut back on expenses and increase income. Learn how to calculate your monthly cash flow >>>
Step 7: Determine your credit health
Credit health involves having a positive relationship with credit without a heavy reliance on usage or having many debt obligations. Having healthy credit means you’re a prime borrower that can receive the best rates and terms for loans you may need. Credit health can be easily monitored through credit scores giving you an overview of how you manage credit today and in the past. Learn more about credit scores >>>
Complete the Analysis
You’ve made it through the seven steps. Now that you’ve calculated, prioritized, listed, and determined some of your key financial wellness numbers, it’s time to sit back and start asking yourself questions.
Look at these calculations and ask yourself how you feel about what you’re seeing. What thoughts come to mind? Are you doing quite well and feel confident? Do you feel secure? Or are you feeling overwhelmed? It’s important to address these feelings and thoughts so you’re aware of the root reasons why it might be challenging to improve them.
Now, let’s focus on the numbers and give them some thought. Do the numbers make sense? Do you have enough assets to cover your liabilities? Can you easily turn assets into cash? Are your debts a big liability in a potential downturn? Do you have enough cash coming in? Are you solely dependent on one income source?
Don’t rush the analysis. Ask as many questions as you can about what these numbers mean. It’s important you fully understand how you’re doing today as it relates to how you dreamed of living. This analysis will set you further ahead when setting your goals and creating your budget.