Are you wondering how to assess your financial situation? We’ve got you!
The first step toward good financial health is to create a budget. However, you shouldn’t stop there because this isn’t a one-time thing. Your financial goals and situation will evolve over time, necessitating re-evaluating your budget and total resources.
Examining your yearly finances becomes even more critical if you are striving to improve your credit score in Canada so that you may receive better mortgage rates and vehicle loan terms or just prepare for other large purchases.
So, plan your future and assess your present with a financial evaluation! Here’s what you need to know:
Financial Evaluation – Introduction
Remember your first paycheck – whether it was from a paper route, childcare, or temporary jobs. Did you get any instructions with it? Instructions appear to be included with even the most basic technologies these days, but we’re left to sort it out on our own when it comes to something as vital as our paychecks.
No one is born with the potential to manage money. We are supposed to be able to handle our money properly by the time we reach adulthood, but few of us are trained how.
- Financial evaluation can help you plan your budget by giving you an overview of your financial situation.
- You match and measure what you spent to what you intended to spend while evaluating your budget.
In many circumstances, our financial situation can make or break us, therefore, knowing where we stand monetarily is crucial. A financial wellness check might help pinpoint what spending and saving adjustments we need to implement in our life.
Financial Evaluation – Why Is It Important?
According to a study by Wealth Professionals, almost 30% of Canadians believed that financial stress took a toll on their health more than anything else. The reason might be a lack of financial literacy or money management skills.
And as a result, they didn’t know how bad their financial health was until the tax season. Therefore, the sole reason you should invest in evaluating your finances is to avoid any unexpected financial surprises in the form of penalties or debts.
- Staying on pace with your budget requires regular financial assessments.
- It can help you manage your money effectively and push you towards reaching your money goals.
- A timely evaluation can give you a clear idea about your current and savings account status.
So, you should do it regularly before it’s too late and you’re already in your retirement phase without zero backup finance. Of course, you don’t want to look into passive income jobs when you should be resting, relaxing, and enjoying your days.
Financial Evaluation – Step By Step Process
The UCP to make your budget work in favour of your finances is by treating it as a live document. This will help you evaluate your finances while making the necessary adjustments to meet your money goals.
At the end of each month, you should review your budget and utilize the result to create your budget for the following month.
It is also a good practice to evaluate your financial budget and goals at least once a year. It takes a few steps to evaluate your budget, but it’s a low-effort procedure that doesn’t require as much time as creating your first budget.
1. Compare Your Net Worth
Figuring out your net worth is the first step in evaluating your financial health. Net worth is a popular approach to rapidly assessing your financial situation. It’s computed by deducting your liabilities from the worth of your assets. Calculating the net worth requires no complicated math.
- Make a list of everything you own that is deemed an asset (plastic money, investments, your residential property)
- Then deduct everything you owe (i.e., study loans, mortgage, insurance, or credit card debt)
Your income has no bearing on this calculation; it’s simply a measure of what you have versus what you owe. The reason to calculate net worth is simple; it’s easier to compare oranges to oranges than to a tomato.
It’s preferable to compare ‘You to You’ than to someone from another financial group. It can assist you in determining how your net worth changes over time.
2. What You Spent Vs. What You Planned To Spend
After you’ve created a monthly budget, you should monitor your expenditures in a budget sheet, desktop software, or online budgeting apps and tools, preferably regularly. Then, with your budget and cost monitoring in front of you, evaluate whether you exceeded the budget, underspent, or kept on budget for the month.
- If your expenses surpassed your budget, you might be able to cut back on any expense categories that were regularly greater than you had planned.
- Similarly, if you underspent more than you budgeted, you may be able to raise your spending for the following month in any categories where you spent less than you planned.
- If you spent what you expected, you’re on the right financial path, but your budget may still need to be adjusted for the following month, depending on your current financial situation.
You can compare your financial performance to your budget using an actual vs. anticipated budget comparison. The source of financial deviations can then be investigated, and you can further make relevant money management decisions to reach your goals.
An effective budget is useless unless compared to actual financial performance. This traditional financial evaluation technique is one of the most essential when it comes to tracking and managing your finances.
3. Analyze Your Spending Condition
You should understand where your money comes from and where it goes. This may appear illogical and time-consuming. However, if you ever want to advance financially, you must develop a strong bond with your money.
You can achieve this by making a monthly budget and sticking to it as much as possible. Because you may “transfer” money from one category to another, you don’t have to be concerned about where your money is going. The idea is not to spend more than the monthly budget allows.
- According to Forbes, the right time to evaluate your finances is now! Because usually, most people leave the difficult part at the end of the year. However, what’s good when you can’t do anything about it?
- The key is not to perfect your every monthly budget, but the goal is to keep sticking to it as much as you can.
It is not the goal to achieve perfection every month. In reality, if you try to be flawless and never spend more than you planned, you will almost certainly fail. Instead, budget the funds you already own and do not go overboard. Make certain that some of that money is set aside for savings.
4. Consider New Income Vs. Expenses
Because a monthly budget represents your yearly spending plan, it’s critical to ask yourself at the month-end: what your income and costs will be for the following month? The income-expense ratio could be similar to your last month’s or drastically different. As per the research of CNBC, money spending and saving habits develop over the year or even years. So, your yearly finance evaluation can’t also happen once but needs you to put effort throughout the year.
Any lifestyle change might increase or decrease your earnings or expenses, which should be reflected in the following month’s budget.
- A loss of employment, for example, could result in a decrease in income.
- Food, utilities, and personal care goods, to mention a few, may all see an increase in spending if you are getting married or expecting a baby.
- One-time or occasional purchases, such as wedding presents or holiday shopping, can temporarily increase spending.
Finance experts advise you to include any unexpected expenses in your budget to avoid any highs or lows in your set monthly spending.
5. Align Your Investment With Income
Having an uncoordinated collection of investments is similar to driving a car with wheels pointed in distinct ways and moving at different speeds. Whether you want to explore different places, own property, or leave an inheritance to your kids or grandkids, incorporating your own ideals takes things to another level.
However, the truth is that in our mid-twenties, we seldom have any long-term life ambitions. Instead, we are more concerned with the realities of today, where our salary is often insufficient to meet our basic needs.
We only realize we have nothing to invest, and our savings account is zero once we have spent half our lives earning. Financial planning for Canadians suggests:
- Think out of the box: Examine your personal aspirations, commonalities, and preferences, and compare them to areas of broader societal needs you can invest in.
- Don’t act like a beginner: Don’t go straight into investments once it’s dawned on you that you have to have extra income streams to secure your present and your kid’s future. Instead, look into the companies and areas you have an interest in. The key is to understand what you’re getting yourself into.
You should naturally consider your time frame, risk tolerance, and keeping money on hand for emergency scenarios to ensure that your investments fit your financial strategy and life goals. But, as Sucheta Rajagopal points out, connecting your personal values to financial choices can significantly impact your life and the lives of coming generations.
Financial Evaluation – What To Review Annually?
When are you most likely to evaluate your overall financial situation? Is it when you get a good return on your investments? Is it when the stock market is down, and you’re worried?
Most likely, the latter, which isn’t always the best moment to make financial decisions, especially if emotions are running high. That’s why doing an annual evaluation of your assets and other financial matters on a set schedule makes perfect sense. Here’s what you should focus on:
● Tracking Investment Plan
Each of your priorities, as well as your saving, earning, and investing strategy for achieving them, should be revisited during your annual financial review. Make any required adjustments if your circumstance has altered. In addition, check your intended asset mix at least once a year to make sure it still reflects your goals.
● Remember The Taxes
Although you have no control over average returns or tax law, you may choose the sort of account in which your valuables are held by deciding how to use tax-advantaged accounts. Generally, the more tax-inept an investment is the more tax you’ll pay, and the better off you’ll be putting it in a tax-advantaged account.
What techniques are you considering to defer, minimize, or manage taxes on your assets more effectively, aside from using diversification strategies throughout your total property?
● Review Financial Plan
You’re not simply thinking about your retirement or financial well-being as you get older. Instead, you’re probably investigating and developing plans to help several people you care about financially, such as your parents, kids, or even grandkids.
An annual evaluation can help you prioritize financial choices that will support your family’s goals for generations to come. It can also assist you in starting long-overdue family money discussions.
It can support you in bringing your family together to talk about important issues such as college finances, caregiving obligations, medical choices, estate planning, and inheritance tax implications.
Financial Evaluation – Bottom Line
Saving for long-term financial goals doesn’t have to mean sacrificing other interests. Prioritizing them, however, is difficult. While all of this may seem like a lot to address, an annual review is well worth the trouble when you consider the time and effort you’ve put into building and protecting your money.
It’s critical to take a long-term approach to your financial plans. The annual evaluation can take place at any time during the year. It’s an opportunity to review your financial, economic, and investment condition. It also emphasizes considering upcoming anniversaries and moments that matter most to the people you care about.
Lastly, did you enjoy reading this comprehensive guide? Let us know what more you want to hear from us!
