Auditing your finances is an essential first step to building a strong financial foundation.

Before you perform any action with your finances, always determine your goal(s) to ensure that your decisions are in line with your goals. Now if you don’t know what your goals are, create some! (E.g. go on Disney vacation, max out my IRA this year, buy a new car, or save for a home). 

Once you have determined your goals, next you will perform an audit. What is an audit? 

An audit is a financial examination of an individual or organization’s accounts— in this case your accounts, all of them.

Performing an audit on your finances is essential to understanding your money. This should be the first step before you decide on any type of budgeting, saving, or investing. If you don’t understand where your money is going or exactly how much you have coming in, how can you know what to do with it or how much you actually have to work with? 

Performing an audit is simple, it’s one of the easiest parts of getting your finances in order and also the most eye opening. You will evaluate your spending and determine where every penny you earn is going. If the money is just flying out of your pocket every month or is it just sitting in your account not doing anything can you actually afford and maintain the budget you have created. 

So enough blabbing, let’s get into the steps of how to perform an audit. 

Step 1. Pull the last 90 days or 12 months of your banking history 

If this is your first time ever doing an audit, I would suggest starting with the last 90 days of your banking history. For those of you who have done this before or want a fuller picture of how your money is being spent, I would suggest the last 12 months. A 90 day audit only covers 25% of the year and your spending habits. If you had a good month(s)  financially or this period doesn’t cover major holidays or other periods of your life where you tend to spend more money (e.g.,  on vacation or during the summer), you may not get the full picture. A 12 month audit paints a fuller picture and also reflects bills that may be quarterly, annually, or  sporadic. When reviewing only a portion of the year, you can forget about a bill or expense that is not covered in the 90 day period. 

Step 2. Sort all your transactions in 4 columns titled Income, Bills, Expenses, and Everything Else

Next, you will review and sort all your transactions. List all of your net (after tax) income per month. If self employed, deduct 25-30% from your income, to account for taxes. Note: My self employed people- a 12 month audit would paint the best picture of your finances.

Separate the transactions into bills, expenses, and everything else. Bills are exactly that;  bills  you receive on a monthly, quarterly, or annual basis. Expenses are considered to be an expense that recurs on a monthly  basis such as gas, groceries, prescription costs, and doctor copays (if you have regular visits). Last is everything else. Everything else is whatever you spend your money on that is not a bill. These are likely your wants or miscellaneous expenses, like the random bill that comes out of nowhere or eating out. Also, shopping, Amazon, Target,You know, all the stores where your money just seems to disappear and you really didn’t need anything when you went in there in the first place. 

Step 3. Get your averages

Next we will determine the average monthly cost of your bill. Take all of your bills and expenses, specifically variable bills (bills that change month to month), and list how much you paid for that bill for that month. Do this for every bill. This will help in creating your budget. Obviously, if the bill is the same amount every month, then you do not need to average that bill. 

Once you have listed the bill amount for each month, you will create an average number to use in your budget. To get the average you will total your bills over the 3 month (90 days) or 12 month period. Then you will divide that total by 3 if you are only doing 90 days, or 12 if you are completing a 12 month audit. The number you get is the average cost of the bill over the 90 day or 12 month period. Use this number to help create and plan your budget. For bills that are variable, this will give you a solid number to use when creating the budget. When you receive the actual bill you can adjust your budget for that month accordingly. 

For the 90 day audit, you will have a smaller picture to create your budget and this may not be best for basing your entire budget without having to overhaul it every few months, but this is a great starting point to get an idea of a good budget and where your money is going. 

When you do an audit of your bills, you can also get an idea of what months, your bill is higher or lower. For example, for your electric bill, in the summer and winter months it will be higher, whereas in spring in fall, it is likely much lower. 

Even though you create your budget, you still need to monitor it at regular intervals to ensure you are on track, especially if you have a lot of variable bills.

Step 4. Review the numbers

Now, it’s time to review your spending and add up those numbers and see where the money is going. 

Are you spending to much on debt payments, eating out, leisure activities, or your bills? 

Is your income enough to cover all of your bills and expenses? Do you need to earn more money?

After you add your numbers, are you left with negative or limited cash flow? If you are in the negative, you need to earn more income and/or reduce your expenses. If you were left with  money at the end of the month, is it enough to align with your financial goals such as investing, saving, or paying down debt?

Step 5. Eliminate unnecessary expenses

After reviewing the numbers in each column, let’s determine where we can make some reductions, to get the numbers to a point where you are keeping more money in your pocket. Let’s start with the  Everything else column. When reviewing this column, did you determine any transactions that were necessary or didn’t align with your financial goals? Such as eating out frequently, where you are literally eating your money (not judging because I love eating out and hate cooking).  Or is shopping your vice and too many trips to the store or online shopping has obliterated your budget? 

Items in this column can often be reduced or eliminated with some financial self control. From this column determine what is actually important and how it relates to your goals. Sometimes seeing how much you have spent on miscellaneous items can show exactly why you aren’t reaching your goals. Your money is flying out the window because you are enjoying life, which is ok, but within reason. 

Step 6. Create your budget.

Now it’s time to create our budget!

There is no definitive way to do a budget that is going to create a miracle in your finances. The only thing that will lead you to success is discipline. Discipline is often the hardest part, but once you get into a rhythm, it’s second nature. The most basic points are, ensuring you have enough to cover your bills and with the remaining  balance decide how you want to first save and then invest. To ensure that you are able to save and invest month after month, these should be line items in your budget, the same as having a bill. Saving and investing is something that always needs to be contributed to.

To be successful and consistent in your finances, you need to make it a priority to save and invest. It should not be optional or “if you have money left over”. 

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