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By Barbara O’Neill, Ph.D., CFP®, AFC® [email protected]

Personal Financial Managers (PFMs) are often in a position to provide their clients with a financial “check-up.” Like a medical exam, a review of clients’ finances can identify strategies to improve their “financial fitness” and screen for potential problems, such as a high debt-to-income ratio. Below are 11 diagnostic tools to assess the strengths and weaknesses of a client’s financial situation that can be reviewed in a one-hour appointment:

1. Online Financial Quizzes

Use Rutgers Cooperative Extension’s six online financial self-assessment quizzes for feedback on various aspects of personal finance. The Financial Fitness Quiz consists of 20 questions about financial practices. Questions with a low score indicate areas for self- improvement.

2. Financial Goals

Review annual progress benchmarks toward financial goals. For example, does someone have half of the savings toward a financial goal at the halfway point of their savings time frame? This worksheet can be used to set SMART financial goals with a dollar cost and time deadline.

3. Net Worth Statement

Review net worth (assets minus debts) to get a “snapshot” of an individual’s or family’s finances. Ideally, net worth should show a steady increase as the value of assets increases with regular savings, and compound interest and debts decrease through steady repayment. This is also a good time to discuss a client’s investment asset allocation, risk tolerance, and recent investment performance.

4. The “Wealth Test”

Use the formula from the book The Millionaire Next Door to assess financial progress based on two key factors: age and pre-tax (gross) income. Multiply these two figures together and divide by 10 to determine a net worth benchmark. The higher the net worth is, relative to this benchmark, the better.

5. Income and Expense Statement

Use this to analyze past spending patterns. There are four components that are totaled for a given month: income from all sources, fixed expenses (e.g., rent), variable expenses (e.g., food), and 1/12 the annual cost of irregular expenses (e.g., quarterly property taxes).

6. Irregular Expense Check-Up

Have clients list all their expenses that come irregularly throughout the year. Examples include school tuition, gifts, insurance premiums, and vacations. Then total each expense and divide by 12. Advise clients to treat these expenses are monthly “bills” and set money aside for them.

7. Financial Ratios

Create financial ratios by linking key pieces of information from net worth and cash flow statements. Liquidity ratio is a measure of the adequacy of emergency savings and is calculated by dividing liquid assets (from a net worth statement) by monthly expenses (from an income and expense statement). The ratio should be 3:1 or better (i.e., an emergency fund of at least three months’ expenses). A debt-to-asset ratio is a measure of solvency. It is calculated by dividing total liabilities by total assets and should be lower than 1.0 and preferably .5 or lower (less than 50 cents of debt for every dollar of assets).

8. Credit Check-Up

Discuss the following topics, as needed: strategies to pay a lower interest rate (e.g., refinancing a home mortgage), progress toward debt repayment, a recent review of a client’s credit report for errors and evidence of identity theft, and clients’ progress toward raising their credit score.

9. Tax Check-Up

Discuss clients’ marginal tax bracket, whether or not they are maximizing contributions to retirement savings plans (e.g., the TSP), and other tax-reduction strategies such as deductions, credits, and long-term capital gains tax rates on assets held more than a year.

10. Life Insurance Check-Up

Use a planning worksheet based on the income needs of dependents. These worksheets, available online and from insurance providers, often assume that survivors need 75% of previous household income and include expenses such as mortgage repayment, funeral, and medical bills, and money for children’s college expenses.

11. Retirement Check-Up

Help clients determine how much they need to save for a comfortable lifestyle in later life. Determine required annual income in retirement, subtract expected Social Security and pension benefits and the future value of current savings, and calculate the “gap”, which is the required amount of savings. A good tool to use is the free online FINRA Retirement Calculator.

For additional information about metrics that practitioners can use to perform a financial check-up, review this article in the Journal of Consumer Education.


Photo by Jeffrey Paa Kwesi Opare