It's become a yearly tradition. Decorate my home, eat tons of delicious food with friends and family, and do my yearly financial audit. Because of my annual financial audit, I am able to save hundreds – if not thousands – of dollars a year, and I would highly recommend that you begin doing one, too. It makes financial planning that much easier!
What is a financial audit? A financial audit, as I define it, is the practice of going through your personal financial records and checking your ongoing monthly expenses, unexpected one-time expenses, splurges, and anything else that is money-related.
When I audit myself, I am taking a cold, hard look at my spending patterns, higher-than-expected payments for certain services, late payments (and why they are late), services that I’m paying for but don’t use, and any other financial habits that are keeping me from financial success.
One of the most interesting parts of my audits is realizing how easy it is to lose track of monthly subscriptions.
In a previous audit, I discovered that I paid $400 for a service that I didn’t use for an entire year!
I now try to avoid monthly subscriptions whenever possible. I save my money and pay up front for whatever service that I would like to use.
Here are a couple of steps that you should take to create a successful audit process:
1. Do it at the right time
First, this is not to be done on an empty stomach or after more than one drink. You need to be alert. Do it midday when you’re awake and ready to tackle your finances. Do this at home during the quietest part of your day, and if you have kiddos or pets, I would recommend doing this when they are out of the house. The fewer distractions, the better.
2. Comb through all of your statements
You will want to look at your bank statements or financial management systems such as Mint, Personal Capital, or even monthly Excel spreadsheets using a secured online system.
3. Know what you're looking for
In my case, I discovered that I spent a lot on food, travel, and debt repayment. Once I discovered where my money was going, I started to think creatively about how to lower expenses in those different categories.
For example, when I began this process I was spending twice the amount that I currently do on groceries and eating out. So I started shopping for groceries once a week, and I downloaded a grocery app that allowed me to save money each time I purchased food.
I don’t feel like I’m missing out on going out to eat or having my favorite foods – I’ve just embraced some new strategies so that I don’t eat my money up!
4. Customize your budget
I decided to embrace traveling less, and when I did travel, I looked at ways to make travel less expensive. I very rarely stay at hotels. Instead, I prefer to use AirBnB and hostels (with my own private room). Those accommodation options are much less expensive. They cost around $30 a night, versus $80 to $150 a night in a hotel.
I still travel to cool places. This year I spent two weeks in San Diego. The year before that I spent two months in Australia. But now I work hard on figuring out my expenses before I do anything, and I pay with cash.
You don’t do a financial audit to give yourself a hard time. In fact, just the opposite. Financial audits are great because they give you clarity and a direction for what your next steps should be.
During one of those audits, I discovered that I was spending $1,200 a year (around $105 a month) on my cell phone service. But I don’t like to talk on the phone all that much. Not to mention, $1,200 a year is the equivalent of a trip to South America for three weeks with airfare! I side hustled like a rock star and paid up to get out of my contract. Then I switched to a pay-as-you-go service that averaged me around $30 a month. This created a savings of $900 a year. Cha-ching!
If this is the first time that you’ve done a financial audit, don’t be scared! Just have fun putting money back into your pocket.