Facing the Beast

A Comprehensive Audit of Your Personal Finance Situation

It's bad... or is it? How good or bad is your financial position? You're reading this because you are wondering, and know this is key: to face the beast in the dark. Bring light to darkness!

The habit of facing the beast and auditing your financial situation will give you a clear picture of your current financial standing. Understanding this is the crucial first step toward achieving financial success, as you have created a baseline. Good or bad, what got you where you are, are your thoughts, feelings, actions, and the habits around your finances. That means you are also the solution!

Conducting a thorough audit of your finances provides clarity and empowers you to make informed decisions. Take your time. Here are some steps to guide you through facing the beast.

Step 1: Gather Financial Documents

Start by collecting all relevant financial documents. This includes:

• Income Documents

  • Pay stubs or paychecks. This gives the short-term perspective

  • Income tax returns. This gives the long-term perspective

  • Additional income sources (side hustles, freelance work, dividends, cashflows that can be used).

• Expense Records:

  • Bank or debit card statements

  • Credit card statements

  • Bills and receipts (if cash was used and not on the bank/credit card statements).

• Loan statements e.g., mortgage statement, car loan.

• Debt Information

  • List of all debts (credit cards, loans, mortgages)

  • Interest rates and minimum payments for each.

• Asset Details

  • Savings accounts

  • Investment accounts

  • Retirement accounts

  • Real estate and other valuable assets.

Step 2: Calculate Net Worth

Calculate your net worth by subtracting your total liabilities (debts) from your total asset value. A positive net worth indicates financial health, while a negative net worth signals room for improvement. Whilst net worth is handy to see if you're going in the right direction (i.e., more wealth), what's more important is the monthly cashflow. You can't eat your house!

Step 3: Cashflow! Analyze Income and Expenses

Break down your monthly income and expenses. Categorize expenses into fixed (e.g., internet, car loan, mortgage/rent) and variable (e.g., credit card payments, utilities, dining out, entertainment) categories. This helps identify areas where you can potentially cut costs or reallocate funds. You must know Income after taxes - Expenses per month. How positive is that per month? When you add your credit card spending, are you generally spending more or less than what comes in?

Step 4: Review Debt Situation

Examine your debt situation in detail. Note the total outstanding balances, interest rates, and minimum payments for each debt. Prioritize the debt with the smallest balance. As Dave Ramsey often highlights, paying off the smallest debt starts the debt snowball, and motivates you to attack the next one. By paying off debts sequentially, you free up more cash to pay the next off!

Step 5: Evaluate Emergency Fund

Check the status of your emergency fund. Ideally, it should cover at least $1,000 (Baby Step 1) and eventually, three to six months of living expenses (Baby Step 3). If your fund is insufficient, consider making it a priority to build up this financial safety net. This applies if you have enough being saved per month.

Step 6: Assess Savings and Investments

Review your savings and investment accounts. Are you consistently contributing to these accounts? Assess the performance of your investments for long-term growth.

Step 7: Check Insurance Coverage

Ensure your insurance coverage aligns with your current needs. This includes health, life, property, and any other relevant insurance policies. Make adjustments if necessary.

Step 8: Analyze Spending Patterns

Examine your spending patterns to identify areas where you can cut back or make more strategic choices. Mindful spending is key to financial success. Spend intentionally with a plan, i.e., the budget.

Step 9: Consider Additional Income Sources

Explore opportunities for additional income streams. This could include a side business, freelance work, or investments that generate more income. As Gary Vee highlights, you can make $100s in garage sales.

Step 10: Set Realistic Financial Goals

Based on the audit findings, set realistic and achievable financial goals. These goals should address debt reduction, savings, investments, and other key areas identified during the audit.

Conclusion

Facing the reality of your finances through a comprehensive audit is a powerful and proactive step towards financial well-being. Use the audit to show what's working and not in your life. Armed with a clear understanding of your financial situation, you can make better-informed decisions, develop successful habits, set meaningful goals, and embark on a journey toward financial success. Remember, the audit is not a one-time task; regular reviews will ensure that you stay on track and adapt to changes in your financial landscape. Make it a habit, do it, then iterate every 6 months. Do the audit yearly.

To your success.