Performing an annual financial audit is one of the smartest money moves you can make to help you understand what’s going on in your finances. It’s a time to find new ways to save money, analyze your current money situation, set new achievable goals and ultimately, make your life simpler.
Before you start stressing, a financial audit doesn’t have to be a big ordeal where you hash out all your money mistakes. Quite the contrary. With four simple steps, you can take the pulse on your finances in as little as an hour and set some real actionable goals to help propel you forward.
Four easy steps to auditing your finances
1. Consolidate accounts
Raise your hand if you have multiple accounts floating out there that you don’t know what to do with? The good news is you’re not alone. I have so many clients who have come to me that have an old 401(k) that hasn’t been rolled over and they either can’t figure out what job it was from or they have no idea what to do with it.
You can start your financial audit by creating a spreadsheet to track every asset you have including 401(k)s, IRAs, Roth IRAs, bank accounts and savings accounts. While you’re at it, also include your login and password information on the spreadsheet, so you have one central document. If you’re feeling up for the challenge, list your debt accounts as well.
If you find that you have multiple accounts and wish to consolidate, here’s how to attack it:
Multiple 401(k)s or IRAs
If you have multiple 401(k)s, you have a number of options, where permitted. Usually, you can leave the money where it is; you can roll it over to another 401k plan, you can roll it over to an IRA, or you can cash out the account value; or some combination of these options. The good news is 401(k)s and IRAs generally speak the same tax language. You can check with your servicing company and see about combining them all into one. Also, you can roll any 401(k)s from companies you no longer work for into an IRA with companies like Fidelity, Betterment, Wealthfront or Vanguard and others. You have lots of options. However, you can’t roll a Roth IRA into a 401(k) or an IRA since they have different tax treatment. Each choice offers advantages and disadvantages, so it’s a good idea to seek the help of a financial advisor to determine the best action plan for you.
Multiple bank and savings accounts
It’s not uncommon to find yourself with a few bank or savings accounts lurking about. There’s no reason to consolidate these accounts as long as they all serve a purpose. For instance, you might have multiple savings accounts for your different goals like your emergency fund, travel savings, and other goal savings. The most important thing to find out is how much these accounts are charging you and how much interest you’re earning. If you find yourself paying bank fees for multiple accounts, you might want to think about moving them to a no-fee option like Simple or Aspiration or any other online account.
2. Re-assess your debt payoff strategy
Debt can be heavy and feel like it’s holding you back from accomplishing your goals. It’s easy to get into a rut where you’re paying your debt from month to month without creating a solid action plan to eliminate it completely. A financial audit provides you with a designated time to look at your debt and set some actionable goals to get it paid off or to move it to more favorable terms.
First, you need a good debt payoff strategy, and here are two of the most common:
Choose the lowest debt you have to focus on and pay the minimums on any other existing debt. Earmark any excess cash you have each month and add it on top of the minimum payment. This will supercharge your debt payoff. Once the lowest debt is paid off, move to the second lowest debt and rinse and repeat. Many people like this method since you can see your debt evaporating quickly by focusing on the lowest debt.
Highest interest rate
This method will save you some cash in the long run, but it can be harder to stick to since often the debt with the highest interest rate might also be the largest debt. Choose the highest interest rate debt you have to focus on and pay the minimums on any other existing debt. Earmark any excess cash you have each month and add it on top of the minimum payment. This will supercharge your debt payoff. Once the highest interest rate debt is paid off, move to the second highest interest rate and rinse and repeat.
Choosing the strategy to wipe out your debt is step 1. Step 2 is to figure out if your debt as it currently stands makes financial sense. Every dollar you can save and reroute towards your debt payoff plan will help you erase your debt ASAP. Consider:
- Can you move any credit card debt onto a 0% or low-interest rate credit card?
- Can you call your student loan carrier and move to a better payoff plan to meet your budget or does private student loan refinancing make sense to lower your monthly payment?
- Can you contact a mortgage broker and see if refinancing your home loan would save you money?
- Can you call your internet, cell phone, and cable company to negotiate a better plan and use that savings toward debts?
- Can you better your credit score which will lend to lower interest rates on future loans (if you don’t know your credit score, you should. You can check it for free at places like Credit Karma and NerdWallet)
3. Assess savings goals
A financial audit is an opportunity, no matter what time of year it is, to refocus and get back on track with your savings goals. Setting big savings goals is a great idea in theory, but if your goals aren’t backed up with a solid plan and tied to your monthly budget, they are hard to achieve. Additionally, performing a financial audit is one of the best ways to uncover hidden savings in your bank account to help fund your goals.
The first step is to break your goals down into manageable amounts. Let’s say you want to save $5,000 for a trip to Hawaii in six months. To achieve this goal, you would need to save approximately $833.00 per month for six months. If that number doesn’t work with your budget, then it’s time to re-assess your goal. Go ahead and break each of your savings goals down and build that number into your monthly budget.
There are lots of great mobile apps that can help you figure out ways to save money given your current expenses. You can use these found savings to put towards your savings goals. My two favorite money saving apps are:
- Trim – Trim analyses your current spending patterns and find ways for you to save money. It also uncovers reoccurring subscriptions that you might want to cancel for even more savings.
- Clarity Money – Clarity Money visually displays your entire financial picture in one mobile app. You can track your spending, set savings goals, access your credit score for free, and help cancel unwanted subscriptions.
4. Organize important financial documents
You’ve already done the heavy lifting of charting your assets, debts and setting up a day payoff and savings strategy. Now it’s time to give your financial documents some love too.
You probably have your financial documents in two places: email and physical copies. You should have an organized filing system for both. For your digital documents, consider creating a password protected file folder on a system like LifeSite to store and share any important documents that you or your loved ones may need. To store physical copies, consider a fireproof safe or even a Safe deposit box at your local bank.
Now that you’ve got your documents secured, it’s time to look at them all and see if they still make sense. Some common documents to evaluate include:
- What is your death benefit and do you have enough life insurance coverage to meet your family’s financial needs (if not, now may be a good time to look into a new policy for additional coverage)
- Who is the beneficiary – do you need to update it
- If you have a term life insurance policy, when does the coverage term end?
- Is your life insurance through work or do you have an individual policy or both?
Homeowner’s and renter’s
- Do you have enough coverage (if you purchased your coverage a while ago, it’s worth making sure you have enough to cover your current needs)
- What is the premium and terms with your policy
- What is your deductible? Do you have that money in emergency savings?
- What is your monthly or annual premium – can you get a better rate elsewhere?
- What is your deductible? Do you have that money in emergency savings?
- Are you able to receive any discounts with bundling your car insurance with your homeowner’s or renter’s insurance?
Will or trust
- Does your will or trust need to be updated (hint: it’s time to look at your will if you’ve had kids or been recently married or divorced)
- If you’ve been putting off getting a will, don’t. It’s simple and can be accomplished online.
Auditing your finances should be a time for finding some financial clarity and setting new goals that you can crush in the upcoming coming months. All you need to do is calendar some time for your audit, grab a beverage of choice and give yourself a small reward once you’ve completed the audit. Now that’s one smart money move.
Shannah Compton Game is a CERTIFIED FINANCIAL PLANNER® professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money.
The opinions expressed in this article are the author’s own. Haven Life Insurance Agency offers this as educational information only. Haven Life does not endorse the companies or offer the, products, services and/or strategies discussed here.