Why a financial health check is the secret to a secure future – and how to do one

managing finances

Why a financial health check is the secret to a secure future – and how to do one

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3 minute read

The new year is a great time to get your finances in order.

Just like an MOT for your car, a financial health check will highlight any shortcomings in your plan. After a year like 2020, it’s more important than ever to ensure everything is on track.

A financial health check could put you on the path to a more secure future. Yet few people know how to carry one out. If this is you, there’s a risk you won’t meet your goals or, worse, suffer serious hardship.

Read on to discover five steps to the perfect financial health check.

1. Make sure you’re protected against the unexpected

No one likes to think about illness or death, but bad things do happen. If you died unexpectedly, your family could struggle financially. They may even be forced to sell the family home.

If you have financial dependants, it’s crucial to have life insurance in place. This pays out a tax-free lump sum if you die during the policy term. Your family could use it to pay off your mortgage, cover the costs of your funeral, or give themselves breathing space.

Illness could also have a devastating impact on your finances. A survey by Legal & General shows the average household is 24 days from the breadline. If you couldn’t work and lost your income, you could struggle to pay your bills and other expenses.

You might not think illness would happen to you. Every year in the UK, around 100,000 people suffer a stroke and there are 175,000 heart attacks. Someone is diagnosed with cancer every two minutes.

Critical Illness Cover and Income Protection can prevent illness from ruining your finances. Critical Illness Cover pays out a lump sum if you’re diagnosed with a specified serious illness. Income Protection provides a monthly payout if you can’t work and lose your income because of illness or injury.

2. Build up a rainy-day fund

Illness and death aren’t the only unexpected events that could derail your financial plan. A broken boiler, collapsed roof, or unemployment could set you back thousands of pounds. If you don’t have enough cash, you could end up going into debt.

It’s a good idea to have three to six months’ worth of expenses in a rainy-day fund. The money should be held in an easily accessible savings account. A fixed-rate account or shares aren’t generally suitable.

If you don’t have a rainy-day fund, start saving each month. A direct debit is a great way of ensuring you save rather than spend your money.

3. Check if your pensions and investments are on track

The next step is to make sure your pensions and investments are performing as you expect. If the value of your pots isn’t as high as you hoped, there are a few steps to consider. These include:

  • Increase your pension contributions in line with pay rises
  • Invest spare cash – for example, a bonus or inheritance
  • Make sure your money is invested the right way.

Interest rates on cash are very low, so there’s a risk your savings are growing slower than inflation. For long-term goals, you may wish to invest in shares. This will give your money the chance to benefit from stock market growth.

The stock market goes up and down, so there’s a risk your investments could fall in value. Diversifying your money across assets classes helps to minimise the risk of one asset harming your portfolio.

You might find your portfolio has become skewed since you last checked it. This is because assets perform differently to one another. If shares have performed stronger than bonds, your allocation to shares may have increased. As part of your financial health check, rebalance your portfolio to ensure it meets your needs and risk capacity.

Your financial adviser can help you create a portfolio that’s right for your needs and goals.

4. Assess your level of debt

Too much debt can lead to missed bill payments, not being able to save money, and anxiety.

Student loans and mortgages aren’t usually an issue. But credit cards, overdrafts or personal loans with high interest rates could prove expensive in the long run.

To reduce your debt burden, try following these steps:

  • Tackle your most expensive debts first
  • Reduce your monthly outgoings
  • Shift credit card debt to a 0% balance transfer card
  • If necessary, use savings to repay debt. Interest on savings is likely to be much lower than interest on debt.

Reducing the level and cost of your borrowing will boost your financial wellbeing today and in the future.

5. Write a will

Writing a will should be a core component of your financial health check. Without a will, there’s a risk your money, property and other assets will pass to the wrong people when you die. Your loved ones could inherit nothing.

By writing a will, you can ensure your assets end up in the right hands and your children are cared for by people you trust. You might also be able to reduce your Inheritance Tax bill.

If you already have a will, use your financial health check to ensure it still reflects your wishes.

Get in touch

If you’d like help in carrying out a financial health check, please get in touch. Visit our website or contact us at hello@capital.co.uk for more information.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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