How to personally audit your financial life to ensure you are on track

In this article, while we will try to establish a structure to personal financial audits, we should also acknowledge that since we are emotionally attached to our finances (and we also have our own biases), it would be necessary at times and for some people to have some external intervention, like getting professional investment advisers to take a look at their finances and identify gaps to fill up fast.

Why a personal financial audit?

Now, coming to the audits. The purpose of a personal financial audit is to take a look at all aspects of your finances.

At times, these things might seem boring and obvious. But please remember that these are the building blocks of the foundation on which the skyscraper of your financial life will rise eventually. So, you have to get these right if you don’t want periodic earthquakes to bring down your skyscraper, i.e., your financial life.

That said, here are the heads under which you should assess your financial life.

The first thing is to check if you have a sufficiently large life insurance cover. Traditional LIC policies of yesteryear (often of ₹5-10 lakh) are of no use now. Your life insurance policy should be large enough to clear all loans, provide money for goals like children’s schooling, higher education and first house purchase, plus also help provide income for regular day-to-day expenses of your dependents.

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If your spouse is earning and contributing to expenses/investments, then ensure they also have a large enough life cover.

Also, don’t depend just on your employer’s life insurance. Get a plain-term plan of your own for this. And don’t buy any endowment/moneyback/Ulips for this no matter how much any relative who is selling these tries to convince you.

Almost everyone needs health insurance. Make sure that you and your family have enough to cover everyone. At least up to ₹15-20 lakh, if not more. Also, it’s best not to depend on your employer alone for health insurance, even though it should be used first (because of its operational ease) if available and if you need to make a claim.

If your parents don’t have health insurance, get them covered as well. If possible, get them added to your corporate health cover.

No one talks about disability insurance, but it is important. Why? Because if you meet with an accident and become disabled or unemployable, then disability insurance can help a bit as it will pay out a lumpsum. This is different from health insurance, which pays for hospitalization bills only.

Emergencies don’t wait for emergency funds. So, make sure you gradually save up a separate pool of money that is enough to cover at least 6 months of your basic expenses (plus insurance premiums) in a dedicated emergency fund.

And if you have low job security and/or have many dependents and/or are the sole earner, then ideally you should have a bigger emergency fund than what is suggested above.

If you have high-interest personal loans or credit card debt, try to repay them as soon as you can. If you have some surplus which is not earmarked for an emergency fund or other near-term expenses, it might be a good idea to use it to reduce high-interest debt immediately.

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If you have a home loan, and you don’t want to carry it forever, then consider making periodic prepayments. Don’t be too aggressive with this, so as not to compromise on your other goal-savings, but small periodic prepayments go a long way. For example—and it might sound like music to borrowers’ ears—if you just pay one extra month’s EMI each year and also increase the EMIs by 7.5% each year, you can easily close a 25-year home loan in about 10 years!

Setting—and achieving—goals

Now coming to financial goals and how to invest for them. First, you need to identify the goals and calculate how much you need to invest to achieve them. You can do this on your own with a bit of mathematics or you can take help from a good investment adviser.

Different goals have different timelines and are served best by different allocations. So, if you have several goals, then bucket them as follows: short-term goals (up to 3 years), medium-term goals (3-7 years), long-term goals (7-8 years and more) and retirement.

For short-term goals, you should primarily invest in debt. For long-term goals and retirement, it’s advisable to have a higher equity allocation if you have at least a moderately aggressive risk appetite.

If your current income doesn’t allow you to save adequately for all your goals, then prioritize and pick a few important ones to pursue first.

That’s about it. There might be other points as well, but I hope this gives you an idea about how to go about it.

Periodic assessment

That said, how often should you do such an audit of your finances? Once a year should be enough, though for some twice a year might be relevant. This should be a kind of periodic assessment of how your finances are—whether you have made any progress over the past year or not.

Dev Ashish is a registered investment adviser and founder of Stable Investor.

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