How to Do an Annual Financial Review for Your Finances

An annual financial review is a comprehensive assessment of your financial situation over the past year, functioning as a personal financial health check-up. The purpose is to track progress toward your goals, identify potential problems, and make informed decisions for the year ahead. This regular examination helps you move from passively observing your finances to actively managing them.

This review creates an opportunity to see what has worked well, such as successful savings habits, and what has not, like overspending or taking on too much debt. This process allows you to build on successes and correct your course where needed, ensuring your actions align with your financial aspirations.

Required Financial Information and Documents

A thorough review begins with gathering the necessary paperwork and data. Collecting these documents ensures you have a complete and accurate picture to work from.

Income Sources

Gather your final pay stubs, which show your gross pay, deductions, and net pay. If you are self-employed, compile your business’s profit and loss statement. Also, collect records of any other earnings, such as from rental properties or freelance work.

Asset Statements

Collect year-end statements for all bank accounts to find the closing balances. For investments, gather year-end statements from your 401(k), IRA, and brokerage accounts to find the total value, your contributions, and any employer contributions. For physical assets like real estate or vehicles, use recent appraisals or online valuation tools to estimate their current market value.

Liability Statements

Collect year-end statements for all debts to identify the outstanding balances. For your mortgage, you will need the statement showing the remaining principal, often Form 1098. Gather similar year-end statements for auto loans, student loans, and the final statement for each credit card to see the total amount owed.

Spending Records

If you use a budgeting app, export the annual summary report. Alternatively, you can use your bank and credit card statements for the year, as many financial institutions provide year-end summaries that categorize your transactions. If you track expenses manually, ensure your log is complete and totaled for the year.

Insurance Policies

Gather the declaration pages for your life, disability, home, and auto insurance policies. These documents summarize your coverage amounts, deductibles, and premiums. This provides a clear record of what protection you have in place and its annual cost.

Tax Documents

Your most recent federal tax return provides a summary of your financial life for the previous year. Have a copy of your Form 1040 and any accompanying schedules, as this document consolidates your income and shows certain deductions.

Calculating Key Financial Metrics

With your documents gathered, the next step is to calculate several key metrics. These calculations provide a snapshot of your financial health and serve as benchmarks to track your progress over time.

Net Worth

Your net worth measures your financial position and is calculated by subtracting total liabilities from total assets. First, add up the value of your checking, savings, and investment accounts, plus the market value of your home, vehicles, and other significant assets. Next, sum up your mortgage balance, car loans, student loans, and credit card debt. The formula is Total Assets – Total Liabilities = Net Worth.

Cash Flow

Cash flow measures the movement of money into and out of your accounts. To calculate it, add up all sources of after-tax income for an average month. Then, add up all your average monthly expenses, including housing, transportation, food, and debt payments. The formula is Total Monthly Income – Total Monthly Expenses = Net Cash Flow. A positive number means you earned more than you spent.

Debt-to-Income (DTI) Ratio

The Debt-to-Income (DTI) ratio compares your total monthly debt payments to your gross monthly income. First, sum up all your minimum monthly debt payments, including your mortgage or rent, car loans, student loans, and credit card payments. Then, find your gross monthly income before taxes or other deductions. The formula is (Total Monthly Debt Payments / Gross Monthly Income) x 100. Lenders often view a DTI ratio below 36% favorably, while a ratio above 43% may be considered high risk.

Savings Rate

Your savings rate shows what percentage of your income you are setting aside. To calculate it, add up the total amount you contributed to all savings and investment accounts over the year, including retirement accounts and regular savings. Divide this total by your gross annual income. The formula is (Total Annual Savings / Gross Annual Income) x 100. This metric measures your progress toward long-term financial goals.

Investment Performance

Evaluating investment performance helps you understand how well your money is working. A simple way to estimate your annual rate of return is to take the ending balance of your portfolio and subtract the starting balance and any contributions made during the year. Then, divide that number by the starting balance. The formula is ((Ending Balance – Starting Balance – Contributions) / Starting Balance) x 100. This calculation provides a basic idea of your portfolio’s growth.

The Annual Review Checklist

After calculating your key financial metrics, it is time to conduct the review. This checklist guides you through analyzing the information to assess your progress and make strategic decisions for the upcoming year.

Review Cash Flow and Budget

Examine your net cash flow from the past year. If it is consistently positive, you are living within your means. If it is negative or lower than desired, analyze your spending records to find where expenses were high. Compare your total income and spending against the previous year to identify trends and adjust your budget.

Assess Debt Situation

Look at your total debt balances and your DTI ratio. Compare your total debt to the previous year to see if it has increased or decreased. If your DTI ratio is high, it may indicate your debt load is becoming unmanageable. Consider strategies to prioritize paying down high-interest debts, such as credit card balances.

Evaluate Investment Progress

Review your calculated investment performance. Compare your rate of return to your financial goals and relevant market benchmarks. Check the asset allocation in your portfolio—the mix of stocks, bonds, and other investments—to ensure it still aligns with your risk tolerance and time horizon. If your allocation has drifted, you may consider rebalancing.

Check Retirement Savings

Verify your total retirement contributions for the year, including your own and any employer match. Compare this amount to the annual IRS contribution limits to see if you are maximizing your opportunities. For 2025, the 401(k) contribution limit for employees is $23,500, and those age 50 and over can make an additional catch-up contribution of $7,500. A new provision also allows individuals aged 60 through 63 to make a higher catch-up contribution of up to $11,250, if permitted by their plan. Finally, assess whether your savings rate is on track to meet your retirement goals.

Review Insurance Coverage

Assess your current insurance policies to ensure they still meet your needs. For life insurance, confirm the death benefit is sufficient for your dependents. Review your disability insurance to ensure the benefit would adequately replace your income. Check the coverage limits on your home and auto insurance to make sure they are high enough to cover the replacement cost of your property.

Analyze Net Worth Trend

Compare your current net worth to the figure from your previous year’s review. An increasing net worth indicates you are building wealth by increasing assets, decreasing liabilities, or both. This trend is a primary indicator of your overall financial progress and provides a high-level view of your financial trajectory.