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How to Evaluate Your Personal Finances

By Jacqueline DeMarco · March 19, 2021 · 7 minute read
We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey.
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We all want to improve our money-management habits, but sometimes the path on how to achieve
this goal is a little unclear.

If someone is looking to take their financial health to the next level, they can follow these seven
steps to gain control of their spending and money.

Tips for Evaluating Your Personal Finances

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1. Determine
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A net worth gives an overarching view of someone’s personal finances. Sitting down and taking time
to calculate their net worth each year can help consumers adjust their financial plans as needed. A
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net worth takes into account everything someone owns and everything that they owe.

To calculate a net worth, take out a pen and paper (or computer document) and make a list with two
sides. On one side, they will list the assets that they own. On the other side, they will list liabilities or
debts, which is what they owe. Then they’ll subtract their liabilities from their assets.

Assets can include money in savings, checking, investing, or retirement accounts; real estate like
one’s home; cars; as well as stakes in businesses; or valuable personal goods like jewelry or art.
Liabilities can include student loans, automobile debt, mortgages, or credit card balances.

If someone finds that their assets are greater than their liabilities, that means they have a “positive”
net worth. On the flip side, if they owe more than they own, they have a “negative” net worth. If the
net worth is negative, they shouldn’t feel bad. They just need to adjust their financial plans in a way
that will help them work towards paying off debt and then working to build up more assets.

2. Plan a Budget
One way consumers can improve their financial health is by following a budget that takes their
financial goals into account. A budget is a plan that someone can follow that will help determine
how much money they spend each month.

Budgeting properly can lead to saving money each month to invest or put towards a large financial
goal, like a down payment. A budget should illustrate how much someone makes and how they
spend their money.

Budgets come in handy if someone needs help guiding how they spend their money. While some
expenses are fixed — like rent — others can be tempting to overspend on — like entertainment,
eating out or daily lattes — without a budget in place.

To create a budget, start by gathering all bills and pay stubs. Alternatively, there are now many
mobile apps, such as SoFi Relay(R), which can keep track of your spending and income. Such apps
can analyze your financial trends for you and will be easily accessible in your pocket always, but
make sure to research the mobile app’s safety and security features since they’ll be holding your
personal information.

Subtract any expenses from income to discover how much room if left in a budget. From there, it
gets easier to determine what consistent expenses to cut and how much to spend on variable
expenses (like clothing or travel). Don’t forget to budget for less visible expenses like saving for
retirement, an emergency fund or paying down debt.

3. Evaluate Housing Costs

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After creating a budget, housing costs are likely top of mind since they tend to be one of our largest
Heads Up: The Fed continues to raise rates — up 3% this year — making credit card debt even costlier. Pay it off today with a
monthly expenses. Taking a hardlow look at how
fixed-rate muchloan.
personal your rent
View youror mortgage
rate —> payments are taking a
bite out of your monthly budget can be helpful.

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A general rule of thumb in personal finance is that you shouldn’t spend more than 30% of income
on housing costs. This allows individuals to be able to afford other discretionary costs.

If someone is spending more than that on housing, they may want to consider finding a more
affordable option so they can make room in their budget to pay down student loan debt or to work
towards other financial goals.

4. Determine Your Debt to Income Ratio

Speaking of debt, determining a debt to income ratio can give consumers a better idea of their
financial health. A debt-to-income ratio takes monthly debt payments and divides them by gross
monthly income.

Lenders often use a debt-to-income ratio to determine if a borrower will be able to make their
monthly payments. If someone is planning on buying a home or taking out an auto loan, they’ll want
to keep their debt-to-income ratio on the lower side. Working debt payments into a budget is a
good way to stay on track towards lowering this ratio.

5. Refine Your Investment Strategy

Investing can be intimidating, which is why it’s important to gain a clear understanding of how it can
help you work towards financial goals in a comfortable way. Investing inherently carries some risky
because there’s a chance of losing some money rather than simply saving money in an FDIC-
insured savings account.

However, those who stash cash away in savings accounts should remember that the value of their
money is actually depreciating due to inflation, the tendency for the price of goods to rise over time.

Investments like securities and mutual funds aren’t federally insured and losing the principal
amount invested is possible. It’s also possible to profit off investments, and diversifying investments
can help mitigate risk. By spreading investments across multiple assets, if one investment loses
money it can sting a bit less because a more successful investment may very well make up for that
loss.

Recommended: Why Portfolio Diversification Matters

Diversification can’t guarantee success and if the market drops as a whole, all of a consumer’s
investments can suffer as a result, but it can improve the chances of not losing a lot of money or all
of it at once.

6. Determine Your Risk Tolerance

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To determine which saving and investment products are a good fit, consumers need to understand
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what their risk tolerance is. For example, if someone
low fixed-rate is young
personal loan. View yourand
rate has
—> 35 years of working left before
they retire, they may feel more comfortable making a riskier investment, such as stocks, that can
lead to bigger gains down the road.
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Those who are 60 may feel differently and may want to go for a safer bet, such as in the bond
market. Generally, if someone is pursuing a short term goal, it’s better not to choose a risky
investment as the chances of profiting during a short period of time are not gauranteed.

Consumers can familiarize themselves with their investment options to help determine which
they’ll be most comfortable with. There are plenty of investment products to choose from like:

•  Stocks
•  Mutual funds
•  Corporate and municipal bonds
•  Annuities
•  Exchange-traded funds (ETFs)
•  Money market funds
•  U.S. Treasury securities

Before making any type of investment, it’s also important to understand what kinds of fees are
associated with holding the investment or buying or selling as part of the investment strategy (like
when investing in the stock market).

Having a solid investing strategy can make it easier to save for retirement or college and to make
hard earned money grow.

7. Set Financial Goals

Once someone has evaluated their personal finances, they’ll have the insight they need to set clear
financial goals.

After considering what they want their money to help them achieve (pay for a wedding, vanquish
credit card debt, retire early, etc.), they can create a financial plan for reaching those goals by listing
their goals by which are most important to them.

They can then put together a timeline, like a monthly savings plan, that will help them meet those
goals.

The Takeaway
From mortgages, tuition bills, utility costs to taxes, modern life throws at individuals all sorts of
financial obligations that they need to juggle. This has made evaluating one’s personal finances to
often be a tricky task.

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Individuals can, however, wrestle control over their financial future by tracking spending habits,
Heads Up: The Fed continues to raise rates — up 3% this year — making credit card debt even costlier. Pay it off today with a
changing them if necessary, and low making thoughtful,
fixed-rate realistic
personal loan. budgets.
View your rate —>

If overspending is getting in the way of reaching important financial goals, SoFi Relay can help
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make staying on track easier. Users can work one-on-one with a financial planner to set goals for
their money and track their financial habits to make sure they’re on their way to achieving those
goals. It also offers free credit monitoring in a way that won’t impact your credit score.

Sign up for SoFi Relay today.

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