How To Complete a Personal Financial Audit

Undertaking Your Personal Financial Audit

For many people who were badly bruised financially from the fallout of the COVID pandemic or those who have been dealing with previous personal financial and debt issues, now is the time to make a change. 

With the cost of living rising significantly in recent times (along with rising rental cost and home prices) more and more people are struggling financially. This struggle has hit people’s debt and savings levels of those already under financial strain are hurting even more. 

For some people in financial strife this can lead to feelings of hopelessness and to avoid dealing with their finances. We are here to say that there is hope for anyone in this situation however we need to find out exactly how bad (or good) your current financial situation is. 

This analysis can go by many names such as a financial review however we will call this a personal financial audit and we will go through the personal financial audit process and the steps forward once you have completed your personal financial audit.

What is a personal financial audit?

As you’ve probably guessed it is a full review of your personal finances and ideally will cover all aspects from income/expenses to all debt (including interest rates, repayments, rates, etc) and any assets you may own. We also recommend this audit extends to any insurances you may have and also a review of your estate planning/business and legal structures.

The main aim of the personal financial audit is to find out exactly where you are financially and to find a base point upon which to build a strong financial foundation from. 

If you are in a worse financial situation than you thought you might be in, a full personal financial audit will give you clues as to why you are in the financial situation you are in and will allow you to make the necessary changes and future financial plans to improve your financial situation. 

If you are married or in a long term or cohabiting relationship then this exercise is best done with both partners of the relationship. 

How to undertake a personal financial audit?

The simple way to do this is to get a blank piece of paper or notepad to write this out. Alternatively you could use a spreadsheet in Microsoft or Google or you could use a suitable personal finance app if you’ve found one that is suitable for this exercise. Keep in mind you’ll want somewhere to store this information so using a Word Document or Spreadsheet is probably the best option. 

As we are recommending all aspects of your personal financial situation are reviewed it’s best to break this down into areas. These include: 

1. Liabilities

In simple terms, how much do you owe? List out all debts that you owe (including any debts owed to friends and family) with all of the relevant details for these debts. These details should include:

Total amount of debt

Interest rate attached to the debt

Repayment amount

Repayment frequency

Date due for full repayment

Name of lender

Is this debt in your name?

Is the debt tax deductible?

**We also recommend that you get a copy of your credit score and credit report from a legitimate provider. If you are based in the U.S AnnualCreditReport.com will provide you with a free credit report from each of the three credit reporting agencies.  

Once you’ve got your full list of debtors and the relevant debt you owe to each we can then move onto the Assets section. 

2. Assets

List all of your assets here along with all relevant details of each asset. These could include:

Name of asset

Type of asset (ie share, property, cash a/c, etc)

Current Asset Value (or estimate this)

Date of purchase

Purchase value

Does this asset provide an income (such as shares paying dividends)

Is this asset held in your name?

(If applicable) What country is this asset based in?

Are there any costs associated with holding this asset? 

3. Expenses/Budget

Tracking your expenses over the last 3 months to 12 months is obviously the best way to see where all your money has gone. It will show you all the trails of your financial journey (good or bad) and give clues as to why you are in the financial situation you are in. 

Once you’ve got your last 12 months of expenses we suggest you review this and create a budget going forward. The worse your financial situation the tighter this budget should be. Once you’ve made a dent with any debts you have and have started saving money then you could look to loosen your budget however you still want to maintain discipline with your expenses. 

We recommend that you automate your finances once you’ve created your budget and have all your income and regular debits going to and coming from one transaction account and setting up regular surplus transfers to higher yielding savings accounts and towards investments. 

4. Income

This is relatively simple, what was your personal and household income for the last 12 months? Was this income in your name (or your partners) or in the name of another entity that you have full or partial ownership of?

Ideally you’ll know what your gross income is and what your after tax personal and household income was.

Once you’ve got your income and know your expenses, hopefully there is a surplus and we can look for ways to best use it from paying down debt and building your emergency fund to investing.  

5. Insurances

What insurances do you have? This will include home and contents, medical, car, life insurance, income protection insurance, insurance on your investments, funeral insurance, basically anything you have purchased to protect you, your family, your property or your lifestyle.  

When reviewing this insurance area this is also a good time to review any insurance gaps that you feel you or your family have and to rectify this (after completing your financial goals and new budget).

6. Estate planning, legal documents and entities you may own or be a part of

Depending on your location, have you got your relevant estate planning in place (wills, powers of attorney, etc). Do you have the correct legal structures in place or do these need to be reviewed? Do your research on this and if your situation is complicated then it might be in your best interest to speak to a lawyer or legal specialist. 

7. Financial Service Providers, Other Service providers, utility providers, etc

This is more about looking for any potential savings or tidying up any regular subscriptions you may be paying for but no longer use. If you have a mortgage or debts, when was the last time you put these to market to review? There may be cheaper or more flexible options available to you. The same goes for your electricity, phone and internet providers. 

Also when was the last time you reviewed your subscriptions services? You might be paying for online or streaming subscriptions for products you don’t use. 

Some additional tips when undertaking your personal financial audit

1. Don’t judge yourself

This is just a historical glimpse of your financial past. It should have little impact (aside from lingering debt or repayments) to your financial future. Accept this and move on. The more you keep bringing up the past the harder it will be to improve your finances and achieve your goals. 

Accept you made mistakes in the past and that you will endeavor to eliminate any future financial ones as you will be much more financial savvy and will have new systems and processes in place to avoid these past financial issues. If you need to acknowledge this financial past, just laugh about these past mistakes and move on. Your financial success is waiting for you, judging yourself over past financial mistakes will only hinder this future progress. 

2. Rip off the band aid and go real deep

Many people put off unpleasant tasks as they are scared to be faced with their shortcomings. If you only complete a surface level review then you are avoiding seeing the issues that lead you to where you are and it’s unlikely you will get to the financial situation you desire until you review everything!

Once you’ve made the decision to choose to become financial successful, to take full control of your financial destiny, to limit or negate any dumb financial mistakes then you can take a step back and analyse any past financial issues or mistakes.

Playing dumb or not addressing your financial issues (and even worse not doing anything about them) won’t help. Take your lumps and start the process to improve your financial situation.  

3. Book some time in your diary to complete this audit

Don’t just put aside 10 or 15 minutes for this. Put aside at least an hour or two (and limit distractions during this time) and go through EVERYTHING regarding your financial situation. The more complete this audit is, the better the starting point for you to improve this situation. 

As mentioned above if you are living with your partner or are in a long term relationship then this exercise will work best if done with your partner.  

What are the next steps after the personal financial audit?

This depends on what comes out of the audit, what debts you owe, what assets you have and what your financial goals and future plans are, some areas to look at include: 

1. Set financial goals?

We’ve discussed this in previous articles however in our opinion setting financial goals will put you on the fast track to repairing your finances and reaching a level of financial security you could have only previously dreamed about achieving. 

Start small such as paying off a credit card or building your emergency fund. Eventually this will entail being debt free and hopefully financially independent.  

2. Do you have a budget?

One of these easiest ways to track your finances is through a budget. Now creating a lean budget is great in theory, sticking to this while trying to live can be a different challenge altogether. 

Start with your essential (or basic) lifestyle expenses (shelter, food, basic utilities, transports, etc) and budget for this. If your financial circumstances will allow it then add in some discretionary expenses and this will be your monthly budget. 

Hopefully with your current income levels this will enable a surplus each month with money going towards debt repayment, building an emergency fund or savings and adding to your investments. 

The worse your financial situation the more strict your budget should be (at least in the short term) . However, like an intense calorie restricted diet it may work in the short term however in the longer term usually won’t be successful. 

3. Are your finances automated?

If one of the outcomes of your audit was late fees or missed payments because you forget or messed up the dates then automating your finances should be one of the next steps you take to strengthen your financial situation. Once you’ve outlined your monthly budget, set up a financial hub where your pay goes into a transaction account with all regular debits set up to be paid automatically. 

Surplus money can then be directed to your emergency expenses account, to additional debt repayment or savings or towards building your investment portfolio. 

4. If applicable look to repair or improve your credit rating

After going through your report make sure all listings on this report are correct and are yours. If not, make sure you dispute any errors on this report. 

Simple steps to repair your credit rating include:

Paying down your debts 

Paying your bills on time

Don’t borrow any more money (aside from a potential debt consolidation, at least until you’ve rehabilitated your credit rating)

Maintaining a good credit utilization ratio

Be careful in closing down old credit cards (as weird as this sounds it show your credit history)

Build an emergency fund

Avoid paying money to people or organizations who state they can fix your credit rating. You can do what they offer yourself and save their fee in doing this yourself. 

Follow the steps above and you will get back on track with your credit score and rating in good time.  

5. Potential debt consolidation

You might find you can consolidate some of your higher interest debts or credit cards into something with a lower interest rate. Alternatively you can use the equity in your home loan to pay out higher interest loans or credit card debt. 

Proceed with caution if undertaking this step and do your research as to making sure you will be better off financially. We also recommend that you have your budget set up and your financese automated before going down this path.

If this refinancing is going to entail moving a credit card balance to a lower interest credit card alternative make sure that the old card is canceled (or and that a portion of your budget allocated to a quick credit card repayment.

Be wary of using home equity when repaying other debt (only using this for higher interest credit card debt and doing your research and planning before undertaking this). 

Financial discipline is the key if you are consolidating debt.  

6. Build that emergency fund

One of your first financial goals should be to build an emergency fund. Initially the aim should be for 3 months worth of lifestyle expenses however the end goal should be an emergency fund of approximately 12 months of lifestyle expenses. 

Once you’ve hit this emergency fund target your financial confidence will grow and you can look to set bigger financial goals, pay down more debt and build more investments. 

7. Increasing your household income is the end goal

Last and most importantly, look to boost your household’s income. To have a financial surplus you have two choices, increase income or cut expenses. Whilst keeping your expenses down to a reasonable monthly amount is wise, you can only cut your expenses down to a certain point as you need to live. 

So increasing your income should be another early financial goal to set. 

Initially this could be in the form of a pay rise or a new job with a higher salary. 

Alternatively this could include taking on a second job or creating a side hustle.

You can look to sell unwanted or unused household items, you can look to make money online or build/buy a website or online business. You could look at alternative investments such as crypto currency or NFT’s. 

You can look to buy or build a brick or mortar business or you can look to build your income and investments through property and shares. 

Increasing your income and your household income should be a high priority for you and will be one of the most important parts of your journey to financial success. 

Undertaking a personal financial audit is a great step to take to claim back your financial power. Not only does it allow you to have a full understanding of your financial situation, it takes away some of the shame and embarrassment of avoiding your financial issues. The quicker you have a true understanding of your full financial situation, the quicker you can start building a strong financial base of which to grow your financial success from.