What are the building blocks of personal financial audit?

Considering India’s highly dynamic economical backdrop, building financial security is crucial for individuals’ financial freedom. A personal financial audit empowers individuals to take control of finances by enabling them to assess their current situation and charting a clear way forward.

Below are the key pillars of this audit as analysed by Sarvjeet Singh Virk, Co-founder & MD, Shoonya by Finvasia

Income analysis: A comprehensive understanding and awareness of all income sources is fundamental in the audit. Various sources include salaries, freelance earnings, business profits, rental income, interest from savings, and dividends. Evaluating income helps in ensuring tax compliance and identifying opportunities for income augmentation. By analyzing the stability and potential growth of each income stream, one can make informed decisions about career moves or investment in additional income sources.

Expense tracking: Further, systematic categorization and monitoring of expenses helps individuals understand their spending patterns and identify potential areas for cost-saving. Utilizing budgeting apps or maintaining a detailed expense diary can highlight unnecessary expenditures, facilitating a more disciplined financial approach. Insight into essential versus discretionary spending aids in better budget allocation, ensuring essential needs are met while limiting frivolous outflows.

Asset Evaluation: One must maintain a detailed inventory of his/her assets, including real estate, vehicles, investments in stocks and mutual funds, fixed deposits, and gold. Evaluating these assets provides current wealth’s snapshot, as well as helps in understanding asset performance and liquidity. This enables strategic decisions regarding asset diversification and investment in high-growth opportunities.

Liability Assessment: Individuals should identify and understand liabilities such as home loans, car loans, personal loans, and credit card debts. It is important to analyze interest rates, repayment terms, and outstanding amounts, to effectively manage debt.

Savings and investments review: It is important to regularly review savings and investment strategies to ensure alignment with financial goals. This includes evaluating the performance of savings accounts, fixed deposits, Public Provident Fund (PPF), Employee Provident Fund (EPF), National Pension System (NPS), and insurance plans. A diversified portfolio that balances risk and return, tailored to one's financial objectives, is key to long-term wealth accumulation.

Tax planning: Individuals should heed to effective tax planning, which can potentially enhance disposable income. Understanding the nuances of Indian tax laws, including deductions under Sections 80C, 80D, and 24, allows for strategic investments that maximize tax benefits. Insightful tax planning can lead to substantial savings and better financial health.

Emergency fund assessment: It is vital to ensure an adequate emergency fund, typically covering 3-6 months of living expenses for financial resilience. This fund acts as a safety net against unexpected expenses, providing financial security and peace of mind. Regular assessment of the emergency fund ensures it remains sufficient as living expenses and financial commitments evolve.

Financial goals setting: Clearly defined financial goals provide direction and purpose to financial planning. Whether it's buying a house, funding education, or planning for retirement, setting specific, measurable, achievable, relevant, and time-bound (SMART) goals helps in resource allocation and investment strategy formulation. Regularly reviewing and adjusting these goals ensures they remain relevant and attainable.

A personal finance audit involves more than just assessing current finances. It requires us to examine our past planning and adjust priorities for future goals. Establishing a regular audit routine encourages us to emphasise savings and risk management in the short term while focusing on long-term investments and returns.