How to Conduct a Personal Financial Audit

Last Updated on September 4, 2018

I usually love December.  The Chennai Summer is busy recharging its batteries and therefore not in full force.  The Carnatic music season seems to begin earlier each year, thanks to some prudent marketing.  The semester is over, and for me, goal-based investing month starts! Dec 2015 was unique because of the  Chennai floods!

Most of what little I know about personal finance and investing comes from time spent staring at Excel sheets in December. All my retirement and goal-based investing calculators were done in December as I evaluated my goals and future cash flow.

In December, I  do a personal finance audit.  That is, I take stock “where I stand” wrt

• insurance (not much to do if one already has suitable insurance policies)
• goal-planning
  • How far away is my financial freedom: Retirement Planning: My Story So Far
  • progress of my son’s education goal
• tax-planning
• review how much I have invested and try to make up for any shortfalls
• take stock of how my expenses have increased and why
• be prepared to invest more in the coming year: I try and increase investments for long-term goals by about 10%

Previously published financial audits

The 2013 personal financial audit

The 2014 personal financial audit

This year, I invite you to audit the action in your financial castle with me.  I shall post a simple evaluator to grade an audit. In this post, how to conduct such an audit is discussed.

If you do not have term life insurance, health insurance and emergency insurance, then getting them are the first steps. These posts may help:

Action: How to choose a term life insurance provider in 30 minutes! Remember Claim settlement ratio does not matter if your life insurance policy is at least 3-years old!

Follow up: Things to do AFTER you take a term insurance policy!

Action: How to Buy a Mediclaim cover or Health Insurance Policy

Follow up: Things to do AFTER you buy a health insurance policy

Once these are in place, we can proceed to the most important part of the audit, which is to find out if we am on track with respect to our long-term financial goals.  Much of this audit process has been completely automated with these tools (and can be done any day of the year):

1.  I keep track of investments with this monthly tracker
2. Track fund holdings, portfolio health and goal progress with Automated Mutual Fund and Goal-based Investment Tracker
3. PPF Tracker
4. Get a perspective of future cash flow with the integrated financial planner

If you have not done this exercise, do try it. It will change the way you think about money.  You could feel more secure and hopefully in control.  It would definitely  tell you where you stand and where you need to be  (if you are not there already).

At the cost of sounding presumptuous, may I suggest that you treat this post as acall to action and try out the above tools?

If you are interested, here is what you will need:

• 60 minutes of peace and quiet.
• A notebook and pen and of course a computer hooked up to the internet.

And this is what you will need to do:

1. In the notebook, date a page and list all possible short-term and long-term goals.
2. Enter the approximate current cost of each goal. If you don’t know it off-hand, source it later.
3. With this information, play with the Visual Goal-planner Hopefully it would help you understand the importance of inflation and how to beat: either by investing enough or by earning large enough returns.
4. Collection all relevant information regarding your investments and savings: SB accounts, FDs, RDs, PPF, EPF, Gold, Stocks, mutual fund holdings, bonds, insurance policies etc.
5. You are now ready to use the integrated financial planner. As you explore the entries, if you need help with planning long-term goals, you can consult: A Step-By-Step Guide to Long Term Goal-Based Investing
6. Take a few days to study and understand the results of the integrated financial planner.  That will tell you how much you need to invest and how much you can invest ….  this year and in all future years up to retirement.
7. This should give you some idea of achievable your financial goals are. You don’t need to take the results of the planner as Gospel. As long as you strive to invest as much as you can and keep expenses at check, you would be fine.
8. The next step is to tag your existing and future investments  or savings with long-term or short-term goals and enter that in the monthly tracker
9. You can use the above-mentioned PPF and mutual fund trackers if you wish.
10. If you have not integrated your tax-planning with goal-planning, now would be a good time to do so. Here is a smart way to go about it:Making the best use of section 80C for tax saving: an example
11. Write down important conclusions in the notebook.
12. Repeat steps 1-10 once a year.
13. Steps like changing investments, rebalancing etc have not been discussed here.  If these steps are followed, my guess is that you would know what to do with your investments because you now set your sights on the only benchmark that counts: your financial health.
14. I will provide some more details on this when I post my personal finance audit.

If you need help with any of the above steps, you can contact me and I will be happy to provide generic help.

Happy Auditing!