If you missed my end of year money moves, don’t sweat it. While I think you should totally go back and read that post too so you’re better prepared for the end of this year (and it has some things to think about at the start of a year too!), today’s post is going to help you even more! Unlike a New Year’s resolution you can easily fall off track with, today’s post can be done in one sitting and help you create lasting changes. I’m breaking down how to do a personal financial audit sponsored by the trusted leaders in credit repair, Lexington Law.
Why you need to do a personal financial audit:
A personal financial audit allows you to stabilize your financial situation rather than constantly nickel and diming yourself and obsessing over the little purchases. It helps you see where you’re at risk for a financial downfall and where you’re knocking it out of the park. It’s a time to not beat yourself up or panic, but instead congratulate yourself on a job well done and objectively look at your weak spots so you can make moves to strengthen them.
Too often in recent years, I’ve seen people struggling on all sides of the generational coin: friends parents who “should” be enjoying retirement are asking their kids to pay them a discounted rate instead of a nanny to watch their grandchildren or they’ll need to go back to work; and young adults living with their parents barely able to get above the poverty line. If the former sounds like you or someone you know, check out this Retirement Planning Guide For Seniors from Lexington Law!
A personal financial audit gives you an opportunity to objectively assess where you’re at, and where you want to go, and lay the foundation for success.
How often should you do a personal financial audit?
Personally, I’d recommend doing one every few years. This way you can check in, make sure you goals match up with your situation and adjust any plans accordingly.
How to do a personal financial audit
Create a financial plan
A financial plan is exactly what it sounds like: a plan for your money. A financial plan lets you know where you’re headed, which can keep you motivated and on track.
Afterall, no one wants to be working when they are 85! With the current state of social security, working well past the current retirement age is a real possibility for many folks as the reserves are projected to run out around 2034!
Questions to help you create a financial plan:
You can approach a financial plan anyway that makes you feel more comfortable. Maybe you start with what your short term goals are? Or you can start with the big picture and your long term goals. Then you can reverse engineer what benchmarks and short term goals you’ll need to reach along the way. Here are a few more things to think about for long term financial success from my friends at Lexington Law.
Other things to consider: when do you want to be debt free? What (if anything) would you like to leave behind? What age do you want to achieve financial independence so you can retire early? We’ll actually be talking a lot about that (financial independence retire early aka the F.I.R.E movement over these next few months so stay tuned!).
Assess your savings
Is you emergency fund set up and target number reached? How did you make progress on last years goals? Are any of the short term goals you identified in the previous step coming due this year? If so, do you have the money already or do you need to set up a weekly (or monthly) recurring deposit into your savings account to reach that goal by a specific date? For instance, a lot of people like to put away $5 a week at the start of the year so they are ready when it’s time to go holiday shopping.
I know credit can feel like an overwhelming and confusing thing but it doesn’t have to be. Check out my post on What Is A Good Credit Score? & The 5 Factors That Make It Up! I promise, it’ll make understanding your credit score easier!
Somethings to do at this time: If you didn’t pull your annual credit reports from each of the bureaus last year, now is a good time to do it. You’ll want to look for errors or inaccuracies. If this sounds over your head, don’t stress! Or if you found any but have no idea what to do, don’t stress either!
Lexington Law Firm is experienced in credit repair. They help their clients with inaccurate, unfair, or unsubstantiated negative items on their credit reports. You can receive a free consultation from Lexington Law today; just click here.
Other things to consider when it comes to your credit: Do you have a debt repayment plan? Are you keeping your utilization ratio below the recommended 30%?
Check in on investments
Investments have a certain ebb and flow to them. It’s normal for there to be losses and wins throughout an investment portfolios journey as investments depend on the overall market. Take some time to check in and ensure you’re meeting benchmarks though. This is a great time to evaluate the risk you’re assuming as well.
For instance, if you set things up in your early 20s you may have set your portfolio to an aggressive level of risk. The general rule of thumb I’ve always been taught is, it’s okay to assume a greater level of risk, the further away you are from using that money since there’s more time for your finances to recover before you’d pull the money out.
So as we get older and move closer towards pulling that money out, we want to assume a lower level of risk to ensure there are no major surprises from a volatile market. That typically looks like a portfolio with more stocks (more volatile) than bonds (more stable) early on, and then as you move towards needing the money you’d probably want to switch towards having a less aggressive portfolio and rebalance with more bonds than stocks.
If stocks confuse you, check out How The Stock Market Works: Explained With Pizza from Lexington Law!
Adjust for lifestyle changes
Take a look at the year ahead and adjust for any lifestyle changes you may be experience. For instance, are you getting married? Having a baby? Did you just land a promotion? Or has your company been experiencing some bumps in the road which could be a red flag of mass layoffs you should be planning for?
That last question in particular is really important and usually very telling around this time of year. In the past, when myself or my husband have worked at companies that were struggling, the end of year bonuses or holiday parties were either scaled back or nonexistent. So now is a great time to check in while things are fresh and evaluate if anything felt off during the holiday bustle.
Use this information to adjust your short term goals, savings plans, or insurance policies accordingly.
Speaking of insurance policies, it’s good to check in on them. When we are younger it’s easy to just start out with the cheapest car and/or health insurance policy and call it a day. But as we get older and experience more responsibilities, there’s more to consider.
For instance, are you fully covered in case of a catastrophic event with your car or home insurance? Did you get health insurance during open enrollment? Did you recently have a kid or are you the primary breadwinner supporting a family? If so, it may be time to consider life insurance. If you’re an employee, does your employer offer a health savings account? Basically, are you fully covered and is everything up to date?
We talked about this in my end of year money moves post, but now is the time to take action! To recap: in a dream world, come tax time you and Uncle Sam would be even. Meaning you’d owe nothing to the government, and the government would owe you nothing.
In fact, if you continually get a big fat tax return check each year, that means you need to look into adjusting your withholdings! A tax return check means you’re overpaying Uncle Sam. In other words, you’re giving the government an interest free loan. Now tell me, when was the last time a bank or the government gave you an interest free loan? See the problem? That money could be in the bank earning YOU interest or being put to better use towards your financial goals.
Check out more tips from my end of year money moves post to make sure you didn’t miss anything else!
There are so many layers to disaster preparedness so I’m going to break this down as best I can into only two categories: environmental and people.
Environmental disaster preparations:
Environmental disaster preparedness means are you prepared for an environmental catastrophe? For instance, I live in South Florida, hurricane season will be picking up in just a few months. I have shutters for my home, but if I didn’t, I’d be adding that as a line to my budget to ensure I can protect my home in some way. I’d also look into revisiting my home insurance policy coverage.
If you’ve been impacted by the wildfires on the west coast, this could mean having a “go bag” packed so you’re ready to go at a moments notice, as well as a plan for a place to go (including money set aside for additional food or lodging you’d need while displaced).
Personal disaster preparedness:
Most of us don’t want to think about this, but should. It covers things like copies of important documents (one copy for home, and one ideally in a security deposit box or another trusted family member’s home, or in a secure cloud server). This also includes having a will in case you pass away (particularly if you have children).
Furthermore, if you do have children, or parents, are funeral expenses earmarked and/or are things planned? My dad passed away when I was 19 years old, I’ll never forget going through the funeral arrangements. It’s expensive. Fortunately we were in a position to cover it, and my mom also used that opportunity to secure her funeral plot and arrangements to ensure I wouldn’t have to endure the financial burden or make arrangements while grieving.
If you have children, it’s something to consider. And if you have living parents, it’s something worth asking about. You can’t control whether or not they will go ahead and make the arrangements on their own, but you can learn their wishes and begin to set aside money if needed.
If you’re carrying debt, now is a good time to evaluate or re-assess your situation. A good place to start is defining a debt repayment strategy here are two of my favorites. If you’ve been following a debt repayment strategy, honestly check in with yourself on how it’s been working. Furthermore, when you defined your goals in the first step of this personal financial audit, did any of them require you to be debt free? Or would you be in a better position to achieve them if you were debt free?
So for instance, maybe your goal is to purchase a home next year. To set yourself up on the best footing, you decide to improve your credit score and be free of all revolving debt (things like credit cards). Thus, you’ve set a deadline for settling all debt. This keeps you motivated and ensures you are prioritizing debt repayments in your budget.
Other questions to ask yourself while doing this: Do you need to consolidate your debt? Put in place a repayment deadline? Is you debt-to-income ratio at or below 36%? You can learn more about what debt-to-income ratio is and how to calculate it here from Lexington Law.
Remember, doing a personal financial audit is a simple way to strengthen your weak spots. There’s no need to panic or beat yourself up with where you’re at. Taking the time to review your finances and think about where you’d like to end up is a massively beneficial step to celebrate.
Have you done a personal financial audit before? What else would you add to doing a personal financial audit?
List of 9 Steps On How To Do A Personal Financial Audit:
Create a financial plan
Assess your savings
Check in on investments
Adjust for lifestyle changes