Time for a checkup?

It’s always wise to have a medical checkup once a year. Various tests are updated, and new issues can be identified that require further attention. Our financial health is no different.

A financial checkup assesses your financial health from multiple perspectives. Your age and personal situation will influence the process and priorities. For example, long-term savings goals and debt management may rank higher for a 35-year-old while retirees might focus on healthcare costs and estate planning. The common goal is a detailed snapshot that highlights opportunities for improvement, areas of concern, and action items.

The scope can vary but your checkup should measure the following vital signs:

• Progress toward long-term financial goals
• Net worth
• The cost of living
• Debt
• Credit reports
• Insurance
• Taxes
• Estate planning
• Other factors unique to you or your family

When Should I Do It?

Annually is recommended. The period between January 1 and April 1 can be useful because it allows for updating annual investment performance data and tax information. But the best time is whenever you can focus on gathering the required details and reviewing options for resolving issues that emerge. It’s also a valuable exercise after major life events such as a marriage, divorce, birth, death or the purchase or sale of a business.

Can I Do It Myself?

Yes. If your finances are straightforward, completing the assessment is manageable. However, by middle age your financial life can become more complex, and reviewing specific issues with your advisor or other experts can be helpful. Either way, doing an initial review on your own can yield questions for your advisors that will lead to better insights and outcomes. If one of the life events noted above has occurred in the past year, it’s a good idea to seek professional advice about the potential impact on your finances.

1. What’s New?
Major life events absorb our attention on a personal or professional level but can also have a larger impact on our long-term financial health that we initially realize. These include a new job, entering retirement, marriage, divorce, the arrival of a new family member, an inheritance, buying or selling a home, cottage, or business, as well as major illness. Each can have unique implications for your financial health. As you read each section below, think about how any recent events could influence your financial well being.

2. Progress Toward Long Term Financial Goals
Saving and investing for retirement is a primary financial goal. Other key objectives may include building up capital to start your own business or buy a home or cottage. Saving for children’s or grandchildren’s education with an RESP is another example. Your analysis of these goals and your strategies for achieving them will benefit from a detailed review with your financial advisor.

3. Net Worth
You can assess this fairly easily on your own – assets minus liabilities – if your financial affairs are relatively simple. If, however, you own corporate assets, private equity or credit, real assets or other illiquid investment assets, including significant art or other non-financial assets, jointly or individually, getting input from tax, investment, accounting, legal or other specialists is recommended to reach a complete valuation.

4. The Cost of Living
This can be a significant factor for younger people and those with growing families. Rent, mortgage payments, groceries, utilities and insurance payments are some of the expenses that absorb cash flow on a recurring basis. Retirees may have additional health and personal care costs. Are there opportunities for reducing, replacing, or redirecting any expenditures? This analysis is linked to budgeting, which is critical for maintaining your financial health and should be monitored at least quarterly.

5. Debt
Reviewing your progress in paying down debt more than once per year is recommended, with close attention paid to interest charged on different types of debt. For example, credit card rates are often extremely high. Extended exposure to high interest rates delays paying off debt, increases the total amount paid over time, and limits your ability to achieve long- term financial goals. Developing a plan for paying down any high interest debt should be an action item. While interest rates are at last starting to decline, the rapid rise in recent years may become an important factor if you have fixed term debt – such as a mortgage – renewing in the near future.

6. Credit Reports
Your credit history begins the first time you borrow money, which is often your first credit card, and evolves throughout your life. Lenders regularly send information about your payment history to credit bureaus, also known as credit reporting agencies. The main ones in Canada are Equifax and TransUnion, private companies that collect, store and share information about your credit history. We may think of loans as being different than bills, but your cell phone and internet provider may also be reporting your payment status to credit bureaus.

Your credit score depends on how well you manage your debts. If you’ve always paid your bills on time, your score is likely good, or high. If not, a low score will reflect those delinquencies. In addition to other lenders, employers, government, and landlords are some of the organizations and people who can review your credit report as part of their decision making process. Your credit report can also reveal indications of identity theft, such as attempts to obtain credit cards or other loans using your name. Check the full report carefully for errors and report any to the bureau immediately.

7. Insurance
Your insurance needs typically evolve over time. Home and car insurance should be checked to confirm that the coverages are adequate and premiums competitive. For example, lower property insurance coverage limits on flood and water damage is becoming more common as the insurance industry experiences major losses on these risks. Disability and critical illness insurance can be important for those with high incomes, particularly when self-employed. Life insurance can be tailored to your personal circumstances: Term insurance is a good idea if you have a large mortgage or other substantial personal debts. Permanent insurance can play a key role in tax and estate planning, particularly for high-net-worth individuals and professional partnerships.

8. Taxes
Your age and personal circumstances (including employment vs. personal corporation income) will influence your tax planning. Younger investors should seek to maximize both TFSA and RRSP contributions. As you approach retirement tax efficiency can be an important consideration in finalizing retirement income plans. Your financial advisor can provide insight and review options appropriate to your age and situation. It’s also important to be aware of the impact of any changes to tax regulations. The recent increase in the federal capital gains inclusion rate is a timely example.

9. Estate Planning
This is an important topic on its own and if you haven’t already devoted time to it, you should note it as an action item. Review the details of your current planning (specifically your will or trust) for any needed updates. Unfortunately, not everyone dies in old age and being prepared for the unexpected can prevent complex, expensive, and even acrimonious disagreements over your estate after your death. Are you still comfortable with your choice of executor or trustee and anyone to whom you've granted power of attorney? Is your list of beneficiaries and allocations up to date? Are there any new tax changes that could have an impact on your wealth transfer plans? Are there any personal developments, including divorce, new grandchildren or unique situations such as an heir demonstrating persistent financial carelessness? Have you clearly stated (in a living will, for example) your personal care wishes in case of a major or terminal illness?

If you own a business, succession planning is a separate issue that may be a critical part of your estate planning. Consult with your professional advisors to ensure that details of your succession and estate planning are not in conflict.

Next Steps

If any of your financial vital signs does not look right, it’s wise to begin developing solutions. Work with your financial, legal or tax advisors to review options and create a timeline for resolving any specific issues. The sooner the better, because, as the familiar proverb states, “an ounce of prevention is worth a pound of cure.”