How To Do An Annual Financial Audit
This post is sponsored by Lexington Law.
Do you have an annual financial audit plan? Basically, your goal with doing a financial audit is to review the money you made, how you spent that money, what you saved, what you spent that you didn’t have (AKA debt you accumulated), and how you’re doing in relation to your financial goals, among other things.
Phew, still with me?
It’s not as challenging or overwhelming as it might seem at first. But it’s a beneficial thing to do to make sure you are not spending above your means, that you’re not accumulating more debt, and that you’re setting yourself up for financial success.
Below, I’ll walk you through 12 questions I go through at the end of every year. Doing this helps me to check in on my numbers but also assess where I’m at with my financial goals. Goal and priorities can change throughout the year and that’s okay! I like to think of my financial goals as flexible targets — something I’m aiming for but can be adjusted as necessary.
I’ll also share things I do quarterly, monthly, and weekly that help make my annual financial audit easier!
Get the free checklist here:
How To Do An Annual Financial Audit of Your Personal Finances
Start your audit by finding the answers to the following questions — and make sure to download the free checklist to go along with it! It will make your audit more straightforward.
1. What are your assets?
Assets are things that you own that have monetary value. They’re usually grouped into two categories: cash/cash equivalents and property.
This includes the total amounts in all of your bank accounts and investment accounts as well as property that you own like home(s) or car(s). You might also include things like expensive jewelry, designer pieces, artwork, or anything with a high monetary value.
2. What are your liabilities?
Your liabilities are what you owe someone else. For most people, this is the outstanding debt that you have.
For example, what remains on your student loans, any medical bills, credit cards, mortgage, car loan, etc. is a liability.
Not all debt is bad debt so having liabilities isn’t a bad thing necessarily. But you do want to be aware of what you owe and to whom!
3. What are your lines of credit?
I also like to take this time to make a list of all of the credit cards and other lines of credit I have opened. I check in on all of them (because the length and diversity of your credit history matter in your credit score) to make sure none of them are carrying a balance or are at risk of being closed.
I don’t want my oldest card to be at risk of being closed because it helps me establish a long credit history.
For myself, I have a spreadsheet with the lender, last four digits of the card number, the website where you can log in, when the card was opened, and the interest rate on the card. It doesn’t have to be complicated — just a list of the most relevant information.
4. What’s on your credit report?
Your credit report, according to Lexington Law, has four main sections:
- Personal information
- Open and closed accounts
- Public records
- Hard and soft inquiries
Each of these may or may not appear on your report depending if you have history for them or not.
When you pull your credit report (get yours for free once a year here), you are going to want to go line by line and make sure everything is accurate.
The primary things you are looking for are inaccuracies and unfair negative items.
Credit repair is a process that can be confusing. As consumers, we have rights that we frequently don’t even know about but that are infringed upon. When this happens, it can be damaging to our credit (and our entire financial lives), which in turn, can wreak havoc on our path to financial freedom.
If you do find inaccurate items or unfair negative items, you do have options. As consumers, we have the right to a fair, accurate, and substantiated credit report. If you’ve found something inaccurate on your credit report, I recommend reaching out to the credit repair consultants at Lexington Law for a free consultation.
5. What is your credit score?
Your FICO credit score is a number that determines your financial trustworthiness. The scale ranges from 300 – 850 (300 being a bad score and 850 being excellent).
This number can impact everything in your life from your interest rates (and how much interest you’ll owe on borrowed money like for a mortgage or car loan), where you live, what you can get approved for, if you can get hired, and how much financial freedom you’ll have in the future.
Lexington Law has a comprehensive guide with three ways to get your credit score for free here.
Many credit cards and bank accounts will also give you this number for free monthly. You’ll want to do what you can to improve your score, especially if you are planning to make a big purchase in the coming year, like a home.
6. What was your total income?
Whether you have one full-time job or many side jobs or a combination, you’re going to want to know exactly how much you made. This is important, not only for tax purposes, but for budgeting purposes as well.
Your income is essentially how much money you have to spend. It’s the total amount that you can split between your future, past, and present self.
Knowing this number is essential for knowing if you are living within your means, doing your taxes, and setting your future financial goals.
Get the free checklist here:
7. What were your total expenses?
This is everything you spent over the course of the year! Including rent, food, clothes, vacation, Netflix — if it cost you money, it was an expense!
How you decide to categorize your expenses is fully up to you. I just suggest being honest with yourself about what is a need and what is a want. Do you need to get your nails done twice month? Probably not. Do I need to get a coffee everyday? Probably not. These are things I would define as wants, no matter how much I feel like I need them in the moment. Get clear on what’s necessary and what’s not so you have a more objective view on how you can adjust your spending to keep it in line with your goals.
Total this up using a tool like Mint (what I personally use). It’s easiest if you categorize things every week (or month) to keep things up-to-date and easier to manage when it gets to be the end of the year.
8. What is your savings rate?
You can find this out by dividing the money you moved into savings and investment accounts by your total income.
So say you moved $15,000 into savings over the course of the year. If your income was $50,000, your savings rate was 30%.
You could use your post-tax income or your pre-tax income to get this number — just be consistent with how you calculate it year after year.
9. Is your emergency fund up to date?
The amount you need in your emergency fund might change year after year.
For example, this year I had my first child. Our expenses increased so we had to make sure we increased our emergency fund as well.
To figure out how much you need in your emergency fund and how to save for it, read our emergency fund guide here.
10. Evaluate your yearly spending — was your spending in line with your goals?
How did what you spent your money on compare to how you wanted to spend your money?
For example, were you able to hit your savings goal? Are you overspending on groceries?
Also use this time to examine how your spending in reality may differ from how you want to be spending your money.
For example, if you want to only spend 10% of your paycheck on groceries but you are spending 15% in reality, how can you get that number down?
There are probably multiple areas this is the case for. Try focusing on one or two in the next six months and tweak your lifestyle to try to reach your goal.
11. Did you meet last year’s financial goals?
Pull out last years financial goals — did you meet them?
If yes, way to go! If not, that’s okay too.
Look at how you succeeded or failed in reaching the goals you set for yourself.
For example, one of your goals might have been to decrease monthly expenses by 5%. Were your December expenses 5% less than your January expenses? What can you reduce in your budget to get that extra 5% into savings?
12. What are next year’s financial goals?
Looking back at your year, what are your financial goals for next year?
To give you some inspiration, my goals typically include things like increase my income and increase my savings rate. I typically set the exact percentage or number I want to increase these by but it varies year by year depending on what else is going on.
Next year, one of my financial goals is to buy a home. I’ve been working on getting my credit score up as much as possible, monitoring my identity, and doing research all while saving as much for my down payment as possible (I’m aiming for 30%!).
Now that you’ve done your annual financial audit, you’ll have a clearer idea of what goals you can realistically set for yourself.
Making Your Annual Financial Audit Easier on Yourself
I know from experience that putting off things until the end of the year can not only cause you extra unnecessary stress, but can be a huge workload to take on! Especially during a time of year when most people are relaxing and celebrating the holidays.
As a bonus checklist, here are things to do quarterly, monthly, and weekly to aid you in your annual financial audit:
- Negotiate a fixed expense
- Evaluate you progress towards your financial goals
- What is your savings rate so far?
- Are you on track for debt repayment?
- Pay your credit cards
- Update your automatic savings transfers
- Check your credit score (any downward movement can mean something is wrong — if your credit score goes down, especially without you being aware of why it might have, check your credit report ASAP!)
- Review your checking account
- Review your credit card statement
So there we have it — the questions to ask yourself in an annual financial audit. Don’t forget to download our free checklist to help you complete yours!
Get the free checklist here:
Have you done an annual financial audit before?