It’s time for your financial health check!

When it comes to health, whether it be physical, mental or emotional, It pays to prioritise it, be intentional in taking steps to become and stay healthy and also to review your progress periodically.

The same principles can and should be applied to your financial health – prioritise it, set up a routine or get into habits to improve your finances, and take time to review your progress along the way.

This post is about financial health checks, a critical habit that I highly recommend that you incorporate into your financial health routine.

5 point summary of this post

What is a financial health check?

A financial health check is a periodic review of your financial position.  How often you carry one out is up to you but making it regular allows you to stay aware of changes that are occurring and take any necessary action required. I personally make time for a financial health check every 3 months at the end of the quarter. I find that this is the perfect interval for me – too often and it can be a daunting task that I put off, less frequently than that then I feel disconnected from my finances.

Whether you decide to do this exercise quarterly, or more or less frequently, the key is to set aside time for it and make it a habit.

Benefits of a financial health check:

• Allows you to keep up to date with your finances
• Helps to ensure that you are moving in the right direction towards your goals
• Assists the identification of areas that need correction or change
• Empowers you with information with which you can make decisions about your finances

What does it involve and how often should it happen?

There are three actions that you should carry out:  

1. Review of your investment statements and balances
2. Consideration of your progress against your budget and financial plans
3. Confirmation that your investment related paperwork is up to date

What investments or accounts should be included? I typically look at just my financial investments and assets only. Cash i.e., in bank and savings accounts I review more frequently and keep a closer eye because of the debit alerts and transactional nature of those accounts.

Other assets e.g., property, cars, business investments, artworks etc can be harder to keep track of as they are less liquid and require a different approach.

How often depends on how much time you have and how much of a priority it is. I recommend that you carry out this exercise at the end of every quarter i.e., 4 times a year at a minimum.

Health check step 1: Review of your Investment statements and balances

Similar to a bank statement you should receive an investment statement from your Investment manager or provider, on a regular basis, especially if you have an investment ‘account’ rather than a one-off investment purchase. The statement should show a number of things:

• Account information and balance(s). Type of account, time period under review and account number. You should also see an aggregate balance of the assets you hold including cash and financial assets.  

• Valuation.  A valuation is an estimate of the market value of your assets at a particular point in time. The most accurate valuation is the market value as it reflects the approximate amount that you would receive if the investment were to be liquidated at the valuation date.

The valuation reflects the gain or loss in the investment over the time period and will vary depending on the type of asset in your portfolio. You should see the valuation of the portfolio at the beginning and end of the period. The valuation may also include a portfolio ‘yield’ or ‘return’ which tells you the percentage increase or decrease in your portfolio value over the period.

Note the direction that your investment valuation is moving in and what the yield is – is the  amount and direction of change in line with your expectations and objectives? If not, get an understanding of why this is – it could be because of market conditions, fees, the method of calculation or even sub par management!

• Portfolio assets. Your statement should also include a list of the assets that you are invested in. Be sure to check the detail to ensure that its correct and again that you can explain any difference or changes from one period to the next. The listing should show the number of units of each of the assets that you hold.
• Inflows and outflows. Typical inflows on an investment account include cash that you pay in, and any interest or dividends earned. Outflows will include cash withdrawn from the account as well as fees or charges paid out of the account. Inflows do not necessarily increase the value of the investment unless they are used to purchase more units in your investment.

If you don’t get a statement for your investments, then you can still get a rough idea of how much you have made or lost over the period using a simple table which captures the start and end value of your investment. The difference is a rough approximation of how much you have gained or lost during the period.

The above is a simple approach that only works for investments from which you are neither adding nor taking out money.

What should I do if my portfolio is not doing well?

Adverse changes over a quarter shouldn’t necessarily lead you to liquidate an investment particularly if the changes are due to market conditions. Exiting an investment before your expected time horizon is something that you may have to do particularly if adverse performance continues quarter on quarter, but again make sure you understand what is driving the performance and think about the exit plan that you made when you first bought into the investment.

Health check step 2: Consideration of your progress against your budget

A budget is a plan for income and expenditure over a set period of time. Budgeting  can be is time consuming but in my view its worth it because it provides direct insight into how you spend your money. Don’t always expect to be perfect – despite actively budgeting for over 10 years I still don’t follow my budget 100% and neither do I always spare the time to review my progress against it.

Life happens and other priorities take precedence, but I promise you that it is worth it. When I do take the time, the upside is that I get better outcomes – a feeling of discipline, motivation from working towards my goals and a sense of success that rubs off in other positive ways too.

For the second part of the wealth check take a look at your budget and critically appraise your income and expenditure plans against reality.

The long way

This is the big ‘con’ of budgeting, the amount of time it takes! If you are reading this, I’m assuming that you already practice the habit of budgeting. If you do, the ideal is to, throughout the period, have registered how much you actually spent against the budget.  I find that I can get away with spending 30 minutes at the end of the month to compare my budgeted vs my actual income and expenditure using my bank statement. This then makes it easier, when I get to the end of the quarter, to have a view on how I am doing and make the necessary adjustments.

The short(er) way

Sorry, I don’t have one! If you are not one for adapting an excel sheet, there are lots of budgeting available so it’s a matter of doing the research and finding one that works for you. The dream app that I am waiting for is one that tracks all of my bank account activity automatically without me having to write anything down, matches my activity to my financial goals and then delivers simple reports that show how I am doing and where I could be better.

The key take away from reviewing your performance against your budget is that you want to identify surpluses and shortfalls in what you have earned and spent. This difference is where the opportunity lies, and you can explore opportunities and commit to concrete actions to enhance your income or channel your expenditure better in the coming quarter. Ask yourself:

• Have I met the goals that I set for myself and if not, why not?
• What did I do well / not so well?
• What am I going to do more of and what will I do differently in the next quarter?

Health check step 3: Confirmation that your paperwork is up to date

The final action to take during your financial health check is to review the paperwork for each investment and investment account that you hold. Documentation serves as a record of the investment transaction and in the case of investment accounts, serves as a legal agreement between you and the investment service provider.

Investment documentation

The documentation for investments will vary depending on the type of investment and if that investment forms part of a larger investment account that you hold with a particular provider. There is some standard documentation that you should receive when making certain investments:

• Shares. If you buy or sell shares directly from a broker then you will be provided with a contract note, which might be physical or electronic, which shows the parameters of the transaction including the price of the equity, number of units, total consideration for the number of units, fees, taxes and charges. It will also show when the equities settle which is the date at which the transaction is complete.
• Fixed income investment e.g., Commercial paper. When investing in fixed income you should get an investment confirmation, similar to a contract note, but which shows you the expected yield of the investment, the consideration (how much you paid), how much you should receive at the end of the tenor, yield / return, taxes and other fees to be paid etc.
• Mutual funds / Collective investment schemes are provided by Fund managers, and you will typically have to open an investment account with them as part of the process of investing in the fund. Investment documentation for mutual and other funds will typically include a fund prospectus or factsheet which gives the low down on the fund, what assets it will invest in (type and amount), expected returns, fund unit price, fees etc. When you buy or sell units in a fund you should be given a confirmation notice that contains details of the transaction including charges and settlement date.    

As a matter of habit, make sure that any time you make a direct investment that you get some kind of confirmation or evidence of the transaction. Where you have an investment account and buy units of a fund, follow up to make sure that the transaction is listed on your statement.

Account documentation

In addition to transaction specific documentation, its important for there to be legal documentation that outlines the nature of the relationship between you and ever new investment service provider that you engage with. What the documentation is called may vary, you will usually have to complete an account opening process which may involve an investment or account agreement which contains terms and conditions.

Terms and conditions are often called small print because there is an enormous amount of information being provided in the smallest amount of space possible so that it is not off putting. Within the small print is a lot of information that you need to be aware of and agree to before you can open an account. Make sure you read it as it tends to cover the parameters which apply to the account including frequency of communication, fees, method of calculation of fees and returns, regulatory requirements, risk warnings, conditions for withdrawal and account closure etc.

On your part, make sure that the documentation exists, that you understand the contents and that it is properly executed i.e., signed properly by one or both parties.

Recap

A quarterly financial health check is an essential tool for keeping up to date with your investments and there are 3 actions that you should carry out each quarter:

1. Review of your investment statements and balances
2. Consideration of your progress against your budget and financial plans
3. Confirmation that your investment related paperwork is up to date

As we near the end of the first quarter of the year, make it a priority to review your investments and keep an eye on your wealth.

Thank you for listening and here’s to your Financial Health and Wealth!