A financial review is an attempt to bring your financial arrangements in line with your personal circumstances and objectives, and external conditions.

A financial review consists of the following steps:

1. On the basis of your present circumstances and objectives, and prevailing economic conditions, sketch out the optimal configuration of your finances.
2. Detail your actual current financial situation.
3. Make any necessary changes.

I’d strongly recommend you do 1) before 2) so your current position doesn’t influence the theoretical ideal.

Income vs. Assets

Our financial situation consists of two components – income (the money received per unit time) and assets (the stock of money and other valuables we possess). What follows is primarily concerned with assets, although a similar process can and should be conducted for income and expenditure; ie ascertain your income, work out how it would best be spent, how it is currently being spent, and implement any necessary changes.

How Often?

Conducting a financial review too often can lead to excessive tinkering and/or anxiety. Failing to do so often enough may fuel financial inefficiency. For most people carrying out this procedure once or twice a year is appropriate.

In the current economic difficulties, it’s advisable to keep a closer watch on deposit interest rates. It’s common for institutions to offer high introductory rates, which are soon reduced to derisory levels once sufficient customers have been attracted.

Financial Review Tools

It’s perfectly possible to carry out a financial review with pencil, paper and (maybe) a calculator. However, numerous computer packages can ease the task ranging from a standard spreadsheet, to specialist free and commercial software.

Constructing the Optimum Mix

Start by setting aside your “rainy day” money. Ideally this should be between 3-6 months living costs with the exact amount determined by your confidence about the future. This money is to tide you over should disaster strike and should be kept readily available, preferably in an interest-bearing instant access deposit account.

Next consider your insurance and pension provisions. At this stage forget what you actually have and consider only what you need. Insurance comes in many varieties, the most obvious being life, house, car, healthcare. But you can also insure against losing your job, critical illness, accident, pets… Insurance is essentially a bet on something you hope never happens, but if it does at least your finances will be taken care of.

The amount of pension cover you need depends on i) the income you hope to have in retirement, ii) the time before you retire, and iii) the expected returns on your fund. Obviously iii) is the most difficult to estimate. The temptation with pension planning is to delay it in favor of more immediate demands, however the golden rule is the sooner you start, the more likely you are to enjoy an agreeable standard of retirement.

Finally, having taken care of the bare essentials, consider the allocation of what remains. These funds can be distributed between cash, bonds, stocks and other asset classes such as real estate (including your home!). There is no unique solution. The right mix for you depends on:

• your financial goals (retirement, buying a house, putting the kids through college…)
• your attitude toward risk
• your age (generally the older you are the more conservative you should be towards risk)
• personal preferences (you may be inclined to investing in a certain stock/sector)

Within broad categories such as stocks and bonds consider more specifically how your funds should be spread. For most people it probably makes sense to keep the bulk of their stock investments in trackers such as ETFs, but you might want to use some money for specific stocks.

Assessing the Current Situation

In this stage you need to work out your actual financial position. Check the balance on all your deposit accounts, and the capital value of bond and stock holdings. Note the type and value of all insurances held and the current worth of your pension fund. Make a realistic valuation of your real estate holdings – based on sold (rather than asking) prices.

Make Necessary Changes

Ideally you should now have two figures against each category – the ideal and the actual. Your actual situation and the theoretical ideal are constantly changing. It’s impossible to keep both exactly aligned. The key task is to identify areas of greatest discrepancy and consider making changes to equalize them. Before making changes, consider the costs of the proposed change alongside its benefits. Change only where the benefits clearly exceed the costs.

In addition to making changes between broad categories, consider also the use of funds within categories. For example, as mentioned above savings rates are frequently changing, so be sure your cash is earning the highest possible rate.

Those having financial difficulties that are considering filing for bankruptcy need to factor in all of their options and weigh the advantages against the disadvantages found in the bankruptcy law. The most obvious advantage to filing bankruptcy is the debtor gets a fresh start. The bankruptcy will wipe out all of their unsecured debts and give the individual a chance to start over. Like all things, with the good there is some bad. For most people, the hardest part of filing bankruptcy is the psychological effects it has on the debtor, as they feel it is a mark of shame. Most debtors also have a tough time having all of their credit cards shut off with the filing. They feel they have lost all their financial freedom, not considering the crushing debt that is sucking the life out of them. After overcoming the emotional effects, most individuals feel relieved after they file knowing that they soon will be debt-free.

After the bankruptcy is filed with the court, the automatic stay will be put in place and creditors will have to stop calling you, garnishing your wages, and taking any actions against you to collect a debt. If the creditors did it not knowing about the bankruptcy filing, you can tell your attorney and they should stop. On the other hand, if the creditors continue on harassing you after they’ve been noticed by the court of the bankruptcy filing, the court can award you actual and punitive damages. To get the most out of the automatic stay it’s important make sure you have the correct address to send the creditors notices to. This way if the creditors are properly noticed, most of them will leave you alone because of the possible repercussions from the bankruptcy court.

At the end of the bankruptcy, the court will issue a discharge that releases you from all liability of the debts specified. In other words, all those debts are wiped out and you are no longer responsible to pay them because of the discharge. The bankruptcy court discharge is a permanent order that directs the creditors to refrain from taking any further action to collect on those debts that you previously owed. Although a debtor is released from liability of the debts that were discharged, a valid lien will remain even after the bankruptcy case. Because of this, a secured creditor can recover property that wasn’t paid for by enforcing the lien and repossessing it. Even after filing bankruptcy, the basic rule is still in play, if you don’t pay for it you can’t keep it. If you want to keep a secured piece of property like an automobile, you will need to work something out with the lender or keep current on your payments.