Financial Health Checklist for 2021

Getting your finances in order and performing a financial health check is a great way to start the new year off right. Assessing your financial situation will look a little different for everyone since we all have our own financial health indicators. But the five steps below are a good place for most people to start.

5 steps to determine your financial health

1. Calculate your net worth

Your net worth is calculated by looking at the total value of your assets minus all of your debts. If you have more assets than debt, then you have a positive net worth. However, if your debts are more outstanding or are negatively impacting your net worth, then 2021 could be the year where you really focus on clearing those debts.

2. Determine your debt-to-income ratio

On a similar note, another good indicator to know is your total debt-to-income ratio. A debt-to-income ratio compares the total amount you owe each month to how much you earn. This ratio is vital when applying for any kind of loan, as it's something that figure lenders pay attention to when evaluating you for a loan approval. 

To calculate your debt-to-income ratio, divide your total recurring monthly debt (this could be mortgage repayments or auto loans) by your gross monthly income (this is income before taxes and expenses).

For example, if your total debt per month is $1,500 and your income is $3,000, this calculation gives you a 0.5 or 50% debt-to-income ratio. 

The lower your debt-to-income ratio, the better. Most lenders will look for ratios below 36%, so if yours is higher, you may need to prioritize clearing debt faster in 2021. 

3. Evaluate your spending 

The truth is that a lot of us underestimate how much we're spending each month. If you are looking to save more money in the new year, evaluate how much you're spending on things like insurance or utilities to see if you can switch to a cheaper rate. Also, take a look at your grocery budget to see if you can make more efficient purchases. 

One way to evaluate your spending is to revisit the past few months and see how much you've spent in different budget categories, like groceries, utilities, insurance, and dining out. With a full overview of the past six months of spending, you'll be able to clearly see where you're overspending and where you can make cutbacks.

4. Create or revisit retirement goals

If you don't have any retirement goals yet, don't worry. Now is the perfect time to start.

The first step is calculating when you want to retire and how much you will need to live comfortably. Factors to take into account include your housing situation and the overall cost of living in your area. 

Once you have a rough figure to work towards, you can then make a clearer plan on how to get there. Can you contribute more each month to your retirement accounts? If you can, it's definitely recommended to help you achieve your goals faster. Or, if you don't have a retirement account set up yet, make 2021 the year you get started.

5. Check-in regularly with your financial goals

Financial goals are different for everyone. Maybe 2021 is the year you finally become debt-free, mortgage-free, or maybe you want to achieve a retirement goal. Whatever your goals are, get them written down and brainstorm all the steps you can take this year to achieve them.

Don't just leave it there though, schedule some check-in times throughout the year to revisit your goals. This could be each month or quarter, but try to keep it consistent, so you don't forget. By regularly revisiting your goals, you're more likely to stay on track, making reaching those goals much more achievable.

Keep your finances healthy

Establishing and following a financial health checklist for 2021 is a great way to get ready for the new year. It's also a great opportunity to really dig deep and discover where your money is going, where it could be put to better use, and how to stay on track to achieve your financial goals. Just remember: With any money goal or habit, regular reminders and check-ins are important to keep you on track.