We tend to think of financial audits as audits which are strictly performed against corporations, business, or Federal & State run Departments. However, financial audits can be incredibly valuable for you as an individual person.
A financial audit is essentially the process whereby financial statements are reviewed and determined to be accurate and fair.
An interpersonal financial audit applies the same principles used in the public and private sectors but applies them strictly to your own finances.
Why should you be doing a financial audit?
Automation can be an amazing tool to simplify our lives. Automation is particularly valuable for saving and investing because it creates a ‘set and forget’ mindset that allows you to effortless place your money where it needs to go without having to be directly involved in the process.
The issue is that this payment structure, truly is ‘set and forget’ and when applied to things you don’t actually care about (or worse – didn’t realize you were agreeing to) and can end up costing you a lot of money if not identified, resolved, and discontinued, immediately.
How to perform a financial audit.
1) Review your transactions
Open the statement transaction histories for any bank account, credit card, etc. for which you use to spend or transfer money.
2) Review one quarter of transactions
Closely examine one quarter (three months) of these transactional statements. Many times subscriptions are set up to occur monthly or quarterly depending on the subscription or reoccurring transfer. A review of one quarter’s statements will help ensure you’re covering all of your basis for a complete and thorough audit of your records.
3) Make sure that you understand EVERY SINGLE TRANSACTION.
You want to make sure that you know:
- Exactly who you’re paying for every transaction
- Exactly how much you’re paying that entity or person
- Whether what you’re paying is what you believed or understood you would be paying.
4) Follow up!
If one of these transactions is not quite meeting the smell test (you’re unsure of the receiving entity, or the amount you’re paying has increased more than you remember agreeing to, follow-up with them or your bank! Discontinue any unwanted reoccurring payments immediately and stop paying for services you're not utilizing, didn't agree to, or can get a cheaper alternative elsewhere.
5) Check your partner’s statements (with their permission).
Sometimes, when rectifying financial records with your partner, you may find that you’re both paying for things without realizing it. You might have very candidate conversations with your partner about the cost of something, you both realize the cost, and talk openly about it. BUT, you might find you’re both being charged for a single expense.
Similarly, consider having conversations with your partner about their ‘why’ and see if some of their transactions can be scaled back or if you can look at a different solution to help scale back any cost without sacrificing service. Talk about ways that you can partner as a couple to save money.
6) Think about “Your Why”
A financial audit allows us to re-review the things we spend money on. Aside from looking into these regular and reoccurring payments and rectifying them if they are unexpected or incorrect, consider whether you feel like you’re paying too much for certain services or if you actually need the service entirely. Discontinue the service immediately if you don't want it. Also, don't continue to pay for something you're not using out of convenience.
Understand the Implications of Cost Savings
We had a client recently who was considering whether to keep or discontinue a music streaming service. The service was only $13 months per month which is small potatoes, but, by discontinuing the service and investing that $13 per month overtime, that $13 per month could grow to 13k over the course of 30-years assuming a conservative 6% market return. Now, 13k over 30 years might not seem like you’re moving mountains, but what if two subscriptions were canceled, or what if a subscription was canceled that was more expensive? I’ve included a breakdown of estimated returns below over a thirty-year period for your review.
As we've said before, we are – have your cake and eat it too – kind of gals. We don’t think you should have to live meagerly or give up anything you don’t enjoy. Rather, we think you should have it all: the cost savings with the services you want. You can get really creative with your financial strategies and look for ways to both save money without sacrificing you just might need to put on your thinking cap to come up with creative solutions. And finally, always remember:
Breakthrough Innovations has created a self guided assessment, at a low and affordable price, to help you conduct your own financial audit independently. Learn more here!
** As a reminder, this information is not considered financial advice. The information is purely for educational purposes. Results are not guaranteed and when considering investment strategies, a license fiduciary should be considered to help provide direct guidance on investment strategies.