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Audit your personal finances to keep money matters in order

A personal finance audit will help you stay on track and make adjustments to keep your finances in order

September 16, 2019 / 08:46 AM IST

Dev Ashish

When you hear the word ‘audit’, the general image that comes to mind is that of corporate offices getting their finances audited.

But audits can be helpful in your personal finances as well. So, how do you conduct a personal finance audit?

Preparing a back-up

- First decide a frequency for conducting the audit. Since this will require some effort, it would be best done as an annual exercise, at least initially.


- Take stock of how adequate your life insurance. Is your life cover large enough to take care of outstanding loans, important goals such as children’s education and first-house purchase, as also pay for regular living expenses of dependents for several years till one of them is ready to take responsibility of the family? Also, does it provide a buffer for large medical expenses?

- If your spouse is also working, both should be insured to some extent. Why? To cover the risk of double-income-family suddenly turning into a single-income-family and burdening the single earner.

- Next, evaluate health insurance. All family members should be under some medical coverage. At least for Rs 10 lakh, if not more. If the family is young, it may still be fine to be insured under the employer’s cover. But it’s better not to depend on employers for insurance. So, over the years, purchase a standalone health policy.

- Also check the need for disability insurance. Why? Because, if something unfortunate were to happen to you, the term insurance policy proceeds are paid to your family. If you get hospitalized, the health insurance is there. But what if you get disabled, become unemployable and restricted to your bed? You will unfortunately become a dependent. So disability insurance can help in such situations.

- Check the size of the emergency fund. If you don’t have it, then it’s a serious risk you are taking. Having at least six months’ worth of expenses in the emergency fund is necessary. So during the audit, ensure that you have it in place.

Remember, the above steps pertaining to insurance and emergency funds are important but not enough. These are not your savings, but back-up plans for worst-case scenarios.

The process

So now you need to audit your savings and investments:

- You may have several goals. But for discussion sake, let’s assume you are saving for them under four separate buckets: short-term (in 1-5 years), medium-term (5-10 years), long-term (10+ years) and retirement

- If you are unable to save adequately for all the goals, then you need to prioritize the goals first. This would mean that you will be saving less than what is required to fully fund all goals. Now assuming you are capable of saving adequately for all goals (or goal groups as discussed earlier), let’s see what it means from an audit perspective when investing goal-wise:

- Different goals have different timelines and are served best by different allocations.

- So, if the goal is in the near-term (or a medium-term goal has become a short-term one as years pass), you need to ensure that the equity component is reduced to a bare minimum or nil.

- If the goal is still in the medium-term, you can continue to invest in line with a balanced portfolio approach (or if need be, re-balance later).

- For long-term and retirement goals, it’s best to invest more in equity. But that said, regular re-balancing is recommended to ensure that the profits during the good years are protected by reducing exposure to the asset which has run up.

- Ideally, your income would increase every year. So one of the action items of the audit should be to ensure that you increase your regular saving amounts every year in line with your income. Or, if not every year, then doing so once every two years is fine too. But don’t skip stepping up for several years.

There can be many more steps in personal finance audit (like checking if returns earned are in line with assumptions or not, etc.). But this is a good start. Frankly speaking, an audit is a fancy way of describing an in-depth review of your financial affairs. But whatever it is called, a personal finance audit will help you stay on track and make adjustments to keep your finances in order.

(The author is the founder of

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