This financial review guide will take you through all the steps you can follow to do your own financial review. Starting from creating a budget, to cash flow analysis, to setting financial goals. It’s all here, with a handy checklist at the bottom for you to follow along. If you’ve never done a financial review before, or even set a budget, everything you need is right here! Financial literacy is so important, and understanding your finances and how to handle them is a great first step. To start, let’s create a budget.
Budget
The key to a financial review is having a financial plan, and the starting point is a budget. Creating a budget can help you understand where your money is coming from, and where it’s going. When you track your income and expenses, you have more clarity and control over your money. You can make informed decisions about what you want to prioritize and allocate your funds towards. A budget can help people across income and debt levels, and it can help you reach your financial goals in a more streamlined way – one where you are aware and in control.
If you’ve never made (or stuck to) a budget, it might sound overwhelming at first. However, we’ve broken it all down into easy steps, with information on each step, and a checklist you can follow while doing your own budget and financial review. Here’s how to do it:
Monthly income
Add up all the income you earn for the month. This includes all your sources of income. Since we’re using it to calculate a budget, you have to add in the money actually available to you. That’s why you should use take-home pay amounts for your budgeting calculations, not gross pay. This category includes money from your wages, salary, side gigs, businesses, etc.
Monthly expenses
Now add up and categorize all your expenses. If you use cards (debit or credit), you can review your bank and credit card statements. If you use cash, make a note of where you’re spending, and how much. Most people use a mix of cash and cards, so you may only need to make a note of cash spending, and then review your statements whenever you are working on your budget. Make a note of your expenses, and sort them into categories based on your lifestyle.
There are two main categories, fixed costs, and discretionary costs. Your main fixed costs may include rent/mortgage, insurance, travel, groceries, debt repayments, etc. In other words, anything that is a regular expense that is essentially the same amount each month. Your discretionary costs can include eating out, entertainment, shopping, etc. These are all non-essentials with amounts that vary from month to month. Categories will vary from person to person, so feel free to modify them to suit your needs.
Now that you’ve got income on one side, and expenses on the other, add up the numbers on each side. Then you will be able to see what your cash flow looks like.
Cash flow analysis
The first step to assessing your cash flow is to subtract your expenses from your income. If you have money left over, you’re living within your means. If not, it means your expenses are higher than your income. In this case, you’ll have to either reduce your expenses or increase your income. Otherwise, it can unfortunately lead to debt.
Either way, you now know your cash flow. Take a look at how much you’re spending in each category, and make note of anything that is higher than you were expecting. This is also a good time to see where you can modify your expenses or cut back on what’s not entirely necessary. Having this sort of detail in front of you can help you understand which of those things are priorities for you, and which ones can be easily modified to better support your cash flow and budget.
Once these changes are made, you can also divert those funds to things that are more important to you personally! This way, your finances can truly support your life goals.
Assets and debts
After you’re done with your budgeting and cash flow analysis, it’s time to take a look at your overall finances. This will help give you a clearer picture of your overall spending. Budgeting and cash flow analyses are useful month-on-month, and to help you stay on top of your finances. Your assets and debts, on the other hand, might not come into play as often, but are an important part of your overall financial health. That’s why it’s necessary to review them.
Assets
Calculate the total of all your assets. This includes everything you have in savings, emergency funds, investments, property, etc. You can also include your RRSP and TFSA amounts in this calculation.
Debts
Sum up the total of all your debts. This category includes your credit cards, any sort of loans like personal loans or car loans, lines of credit, mortgages, etc. While doing this, it’s helpful to make a note of how much you owe on each, and what the interest rates are. This is also a good time to make sure none of your debt products have exceptionally high interest rates. If they do, look into other options for financing. For example, if you have a credit card with a high APR, you may want to make a plan to pay it off, or to start using cards that have more attractive APRs on offer.
Once you’ve added up each side, you can calculate your net worth with this simple formula:
Assets – debt = your net worth
If the number is positive, congrats! You have a positive net worth and are on the right track. If the number is negative, you have more debts than assets. The budget and cash flow analysis should help you pinpoint which areas are affecting you negatively. You can then make adjustments accordingly.
Financial Goals
By this point, you would have created and reviewed your budget, cash flow, and net worth! It’s a time-consuming process and can be pretty difficult – especially if it’s your first time. It’s also very rewarding, so give yourself a moment to acknowledge that you’ve done something good for yourself that will serve you well in the future.
Now that you have everything in place, it is time to review (or set, if this is your first time) your financial objectives. The benefit of this process is that it helps clarify your short-term and long-term financial goals. This might also be a good time to consider other life goals, like further education, professional development, saving for a house, or paying off debt. When you are able to incorporate these plans while setting your financial goals, you can allocate your funds in the direction that best serves you.
See if you’re on track to meet those goals, or if you need to make adjustments to your budget and cash flow. If your life goals require funds to achieve, you may want to make space for these priorities in your budget.
Know that you can revise or modify your goals if/when your priorities change, or your situation changes. The important thing is that your finances and cash flow should serve your goals and support what you want to do.
Tips
Frequency of budgeting
Update your budget every 2 weeks, or at least once a month. This will help you quickly notice any new trends, and make modifications if necessary.
Build an emergency fund
If you don’t have an emergency fund, prioritize building this before any other kind of saving. Ideally, an emergency fund should contain 3 to 6 months of living expenses. However, even $500 makes a difference. Build up to it slowly, but add some money to your emergency fund every paycheck. Prioritize this and pay yourself first.
Retirement planning
See if you can increase contributions to your RRSP and TFSA if there’s space in your account and if your income allows it.
Insurance
Check your coverage and see if you want to update or modify the provisions in the coverage. Make sure it covers the things that are important to you. Read the fine print, and don’t be afraid to ask questions. They are legally required to provide you with transparent and honest information. Don’t hesitate – it’s your money.
Credit health
Check your credit report and credit score periodically. See if you need to improve your credit score. It could be as simple as staying within your credit usage limits, and not spending up to your maximum available limit. Staying a little below it, and paying off your cards in full can significantly boost your credit score.
Estate planning
If relevant to your lifestyle and needs, update your will, trust, or beneficiaries to reflect your decisions and priorities. Having the right paperwork in place can make things smoother for you and your loved ones.
Debt
If you’re currently dealing with debt, make a plan about how you’re going to pay it off. Look into debt repayment strategies like debt consolidation, lower APR credit cards, consumer proposals, or debt management programs. Depending on your needs, you can then see which approach fits best.
Action plan
Once you’re done with your financial review, you would ideally have some specific next steps to work on. Keep an eye on appropriate timelines to match your goals, see if you want to automate bill payments, modify your budget to reflect changes, or any other actions that suit your preferences.
Review
Continue to review your financial plan regularly and assess how it works. Keep an eye on your budget and spending. Budget biweekly or monthly, and do a full financial review at least once a year. Download your free Financial Review Checklist below to help guide you through the process.
Conclusion
Remember, if something doesn’t serve you, you can certainly change it. The purpose of financial planning is to help support your life and growth. If any part of the plan no longer works for you, stay objective and feel free to modify it. Try to make sure your income is higher than your expenses – either by reducing your expenses or increasing your income. Prioritise building an emergency fund and paying off debt. If you’re currently dealing with debt, you can contact one of our trained Credit Counsellors for advice. They can help you figure out which debt relief strategy could be the right fit for your specific situation.
