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Couple working on their financial analysisA financial needs analysis (FNA) is an overview of your current and future financial situation. It takes into account assets, such as wealth and income, set off against liabilities, such as debt and dependents. By creating a financial needs analysis you can get a full overview of your financial situation and how it relates to both your long- and short-term goals. Once you have an FNA, let a financial advisor help you make the wisest use of it.

What Is An FNA?

A financial needs analysis might be the epitome of a deep, yet simple, system.

In theory a financial needs analysis is fairly simple. For most people, conducting an FNA is the first step towards making an overall financial plan. In fact, many (if not most) financial and insurance advisors use this first when meeting with new clients.

With an FNA you take a look at your overall financial position. The purpose of the exercise is to understand how much money you have as compared with your bills, debts and other liabilities. Once you understand how much you have coming in vs. going out, you can structure your spending and saving based on your overall financial goals.

A financial needs analysis includes:

  • Income and assets

How much do you make each month? What kind of wealth do you have, including securities and other investments? In a nutshell, how much do you earn and how much do you have?

  • Expenses and liabilities

What is your monthly budget? How much do you spend each month, and on what? At the same time, what are your debts? How much do you have going out the door in debt payment and other bills? Finally, who are your dependents? Are you taking care of any family members or anyone else who represents a monthly commitment?

  • Short- and long-term goals

What financial goals do you have? How much money will you need to achieve them, and when would you like to achieve them by?

How To Conduct an FNA

Defining a financial needs analysis is simple. Conducting one is far more complicated. First of all, actually gathering together all of the information you need for an FNA can be surprisingly difficult. Major issues to consider include:

  • Actually accounting for all assets

For most people monthly income is a fixed number that they know by heart. (Although make sure to use your take home pay, after taxes and withholding, not your top line number.) What other assets do you have though? Do you own a car? A home? Do you have a 401k or health savings account? Do you have any investments? The “pro” side of your financial needs analysis will often be more robust than most people give themselves credit for.

  • Actually accounting for all expenses

Graphic of a digital stock price display and stacks of coinsHowever, the liabilities side of this chart is also a bit difficult to pin down. Once again, most people capture their major expenses, but they miss the smaller or day-to-day things. How much do you need to spend getting to and from work, for example? How much do you spend on recurring subscription fees, and how much do you need for other elements of your daily life? Just because something isn’t a scheduled expense like the cable bill doesn’t mean that it isn’t important. Don’t forget to account for how much you really spend, not just the numbers that are easiest to remember.

  • Establishing clear and realistic goals

It’s important to be realistic when you establish your goals. Owning a yacht looks like fun, and plenty of journalists intend to retire by writing a couple of bestsellers. But just because you can plan it doesn’t mean it’s a good idea. Establish goals that are achievable and set time frames that are realistic. At the same time, be clear in your plan about which goals you need and which ones you want. There’s nothing wrong with saving up for your trip around the world, just so long as your financial plan prioritizes getting out of debt first.

  • Keep it about your bills

Notice that we have not included any discussion of lattes and avocado toast. That’s because a financial needs analysis is, as the name suggests, about your financial needs. You want this to include your assets and your commitments, not optional spending like lifestyle and errands. That’s because an FNA is about how to structure your spending around your goals and needs. This isn’t about accounting for your entertainment expenses, it’s about deciding what your entertainment budget should be based on your commitments and goals. If you want to buy a house in the next 18 months, what kind of luxury budget will still let you save up your target down payment? If you want to retire at 60, how much money do you need to set aside each month?

Your Time Horizon

A financial needs analysis can either long term or short term. Short-term analyses look at goals within the next few years (or even months, sometimes). They are fairly simple exercises that let you decide how to meet your next goals. Long-term analyses look years, even decades, down the road. They involve retirement planning and other major milestones.

Long-term financial needs analyses are far more speculative projects, since much will change over the course of your working life. This is why most financial advisors recommend that households conduct a new FNA every few years to update their financial position. It doesn’t have to take long, but it can be a very useful way to keep your financial life right on track.

The Bottom Line

Man calculates his financial assets

An FNA entails comparing your income and assets against your liabilities and other commitments. The purpose is to understand your financial position overall and how you can achieve your financial goals over time. It forms the basis for intelligent financial, retirement and even estate planning. Completing an FNA is only half the battle; putting the results of an FNA to practical use is the other half.

Tips on Finances

  • Want to know a secret? Here at SmartAsset even we think personal finances can get a little overwhelming sometimes. We’ve found this handy tool useful to help us and others understand budgeting just a little bit better.
  • Nor do you have to do it alone! Financial advisors can offer immense help as you chart your investment and retirement course. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.

Photo credit: ©iStock.com/FG Trade, ©iStock.com/Dilok Klaisataporn, ©iStock.com/Pekic

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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