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Stay Financially Healthy with an Annual Financial Checkup

Nov 15, 2020 4 min read Heather R. Johnson

Key takeaways

  • An annual financial checkup helps you stay on track with your goals.
  • Budgeting is a simple way to control spending and increase savings.
  • A retirement portfolio review will help secure your future.


You get annual medical checkups and biannual dental checkups. Why not give your finances the same kind of "primary care?"

By performing an annual financial checkup, you can assess whether you're following your budget and making the most of your investments. If you've veered off course, you can get back on track to meet your financial, career and life goals.



When should you give your finances a checkup?

The beginning of the year is an ideal time to review your financial health. You'll get a head start on tax season, and you'll have year-end pay stubs and account statements to work with. It's also a good time to set goals for the year to come.

However, if you're monitoring your retirement fund and approaching your Social Security “full retirement” birthday—65, 66 or 67, depending on when you were born—you may want to review your finances around that date.

Then too, if you're getting married soon or have a baby on the way, you might want to assess your finances before these major life events.

Of course, everyone’s situation is different—and yours may have changed drastically in the wake of the COVID-19 pandemic—but your financial checkup should generally include these components:


Analyze income and expenses

Compare 2020's after-tax income with your expenses. Did you spend more than you earned?

Accounting software allows you to run profit and loss reports for easy income-expense evaluation. With a profit and loss report, you can see how much you spent on basic expenses like rent and utilities, as well as luxury items including restaurant meals and clothing splurges. Remember, these “discretionary” expenses can easily throw your budget off track.

Next, analyze cash flow for the year to come. Do you expect any unusual expenses, such as a new car or that big vacation you couldn’t take in 2020? Do you plan to retire or take maternity leave? If you don't have savings to cover changes to your cash flow, adjust your spending accordingly.


Revise your budget

Creating a budget is a great way to keep spending on track and meet your savings goals for the year. Seeing where your money goes can be an eye-opening experience. A budget calculator Opens in new window can make running your numbers relatively painless. If you already make a budget, adjust it annually to account for changes like health and home insurance costs or income increases.

Compare your various expenses (morning lattes included) to your monthly income. If you find you have excess income, consider meeting with a financial professional to determine the best way to put that money to work.


Review your retirement savings

Review your IRA, 401(k) and other retirement plan contributions. Are you saving enough? Can you save more?

Aim to contribute at least 15% of your paycheck to your retirement funds. If that sounds like a stretch, start smaller—say, at 10% or as much as you can—and increase your rate by one or two percentage points each year.

If you're at least age 50 (or will be by year-end), take advantage of "catch-up" contributions: The IRS allows you to contribute up to $7,000 to traditional and Roth IRAs—$1,000 above the standard limit—and you have until April 15, 2021 to fund yours for 2020.

For workplace retirement plans like 401(k)s, 2021 catch-up limits are $26,000, or $6,500 above the usual $19,500 cap.

Also, as your target retirement date nears, consider paring back on your investment risk by allocating less of your savings to stocks and more to fixed-income investments such as bonds. Talk to a financial advisor to determine whether your portfolio contains an optimal mix of stocks and bonds for your age and goals.


Make a debt-free plan

One silver lining to 2020’s financial clouds is that the average individual’s credit card debt fell for the first time in eight years, to $5,315, according to credit bureau Experian Opens in new window. Yet with interest rates Opens in new window on “drastic plastic” hovering close to 16%, that's still a lot of money wasted on interest payments.

Can you set goals for 2021 to reduce credit card spending and pay down debt? You'll save hundreds to thousands of dollars annually—money you can invest and watch grow.


Review insurance policies

During your annual financial checkup, assess whether you have the right amount of insurance for your life stage and situation.

For example, if you've accumulated considerable assets since you bought your homeowner's or renters policy, you may want to discuss an upgrade with your insurance agent or broker.

If your children have graduated from college or you've paid off your mortgage, you may need less life insurance. If you just had a second child, you may need more.

It's not easy these days to find better health insurance rates, but it's worth the time to review your employer-sponsored plans, individual plans or Medicare Advantage plans, particularly if you can get in before the annual open enrollment period ends. You may find equal or better coverage at a lower rate, giving you that much more to save—or invest in your skinny vanilla latte fix.


What you can do next

Look for an accounting software to help with your income-expense evaluation. See how much you spent on basic vs. luxury expenses, and revise your budget accordingly. And of course, you should consult your tax and legal advisors regarding your circumstances.


Heather R. Johnson writes about finance, small business and health care from Oakland, Calif. Her work has appeared in the San Francisco Chronicle and Houston Chronicle, among others.


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