How to Conduct a Personal Finance Audit

 

Geoff Williams

 

If your budget is a mess, or if you constantly feel like you aren’t prioritizing the right things when you spend money, you probably need a personal finance audit. That doesn’t mean you need to hire a professional, though. A personal finance audit is something you can do yourself, and it’s really just a fancy word for an activity that people have been doing since money was invented: taking a deep look at their own finances.

 

If you’ve never done a personal finance audit, here’s an easy step-by-step guideline on how you may want to approach it.

 

1. Create Financial Goals

 

This step is baked into the entire concept of a personal finance audit. Most people recognize that they’re living paycheck to paycheck and never have enough money, so they start examining why they’re constantly short on cash. Some recognize that they never have the money for any of their personal finance goals and decide to do a financial autopsy and see where things are going wrong.

 

If you have decided to do a personal finance audit but haven’t really thought about goal-setting, this is really the first step. Ask yourself: Why am I doing this, and what do I hope to achieve?

 

2. Collect Financial Data

 

How much are you spending each month? What are you paying for your mortgage or rent? How much do you spend on utilities? How much do you spend on groceries?

 

Yes, this describes putting together a budget. You may want to pull up how much money you have in retirement accounts and how much debt you have. Do you know your net worth? If you’re going to audit your finances, you need to have something to audit. You should gather up as much financial information on yourself as you can. This could be a good time to look into getting a budgeting app or starting a financial calendar. You can’t have too much information for a personal finance audit.

 

3. Get to Know Your Budget

 

Once you have all of the financial information you believe you need, it’s time to examine your budget. If you don’t have a budget, you’ll need to create one. If you already have one, you’re going to want to start studying it.

 

“The first thing I would recommend is to look at details of their cash flow,” says Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan. “In order to manage money and budget properly, you need to know what’s coming in and going out for expenses. It’s pretty easy these days with banking and credit card apps that show you every time you swipe.”

 

He says there are apps like Rocket Money (you may know it as its old name, Truebill) that will tell you where your money is going every month.

 

“Once you know where you are spending, you can differentiate essential expenses like rent, mortgage and utilities from discretionary things like dinning out or personal shopping,” Tallou says.

 

Once you have that information in front of you, you can start to make sense of everything. In other words, you may start to notice:

 

There are reasons or patterns you are always broke. Tallou says that maybe your bills aren’t spread out evenly throughout the month. “It hurts when the majority of a paycheck gets absorbed by bills, and you won’t have much for yourself till the next pay period. If you notice all your bills are close in due dates, call and ask to change the billing cycle so your cash flow is more efficient,” Tallou says.

 

There are psychological reasons you’re overspending. Maybe you’ll come to realize that you spend a lot of money on Sundays as a way to deal with the fact that you hate going into work on Mondays. Plenty of our purchases are rooted in psychology. Doing a personal finance audit might help you understand why you spend money the way you do.

 

You’re wasting a lot of money. That daily cup of coffee has become the poster child of wasted money – but if you’re drinking and enjoying it, is it really a waste? If you notice subscriptions that you no longer derive much pleasure from – such as a barely used gym membership – those may be worth striking from your budget.

 

You’re doing everything perfectly. Well, it’s possible. It won’t help you if you’re too easy on yourself and don’t look for genuine areas in your spending where you could improve. Maybe you’ve already trimmed all of the fat out of your budget. In that case, it may be time to ask for a raise or try to change careers.

 

Make a Financial Plan Based on Your Personal Finance Audit

 

Once you start recognizing the weak areas in your finances, you can start to develop a plan. That might mean a lot of things, but you may want to consider a few strategies:

 

Resolve to save more money. Many experts suggest that you should be aiming to put aside 15% of your annual salary toward retirement. Yes, that’s quite an ask for some individuals and families, but even 1.5% would be better than nothing.

 

“If someone wants to be a better saver but doesn’t know where to start, the best way is to take small steps and set aside a small percentage of your earnings,” Tallou says. “The most important check a person can write is the one to themselves. You need to pay yourself first.”

 

If that sounds overwhelming, or you don’t know how much to put away, Tallou advises: “Start with saving 3% to 5% of your paycheck and set target dates to increase it by small increments. I always ask (clients), ‘Can you live off 95% of your income?’ The answer is always yes, so it can be done.”

 

Come up with some spending policies. We all have rules we try to not break – whether it’s no caffeine after 5 p.m. or a weekly date night with your spouse. Well, it may be time to come up with new, firm spending policies.

 

Cameron Burskey, managing director of retirement security at Cornerstone Financial Services in Southfield, Michigan, offers a couple of spending tips that may help if your personal finance audit came away with some brutal conclusions: “If you think you need to purchase something, wait one day and ask yourself again if you still need it. Before you go out shopping, make a list of what you absolutely need and do not waiver from it. This applies to all kinds of shopping, not just grocery shopping.”

 

Develop a spending plan. In other words, keep analyzing and modifying your budget.

 

“Find a system that works for you, whether it be an old-fashioned pen and paper, spreadsheet on Excel or an application on your phone. Sticking to this long term is important, as finances will continuously be a factor in your life,” says John Bergquist, president and investment advisor representative at Lift Financial in South Jordan, Utah.

 

Make sure to spend money on fun stuff. Life isn’t all about budgeting and saving money for retirement. “While getting your financial ducks in a row is important during a personal finance audit, it’s also important you reward yourself for staying on track,” Bergquist says. “Consider building a vacation fund into your monthly spending budget. Once goals and obligations are met, a reward may be necessary to keeping your morale up. Setting rewards can also help you to continuously keep your finances in check.”