GET FINANCIAL CONTROL IN 3 MONTHS WITH THIS SIMPLE AUDIT
Conducting a financial audit is more about understanding one’s financial landscape than merely crunching numbers This process involves addressing the emotional aspects of money management, and it encourages individuals to separate feelings from factual financial data. The feeling of being “broke” or “rich” can be deceptive and must be disentangled from actual monetary figures.
The main framework used in this audit consists of three straightforward questions:
- Income: What was earned?
- Expenses: What was spent?
- Net Savings: What amount remained?
This method avoids judgment on spending habits and focuses on understanding financial facts without the need to stigmatize certain expenses or emotional responses to money. This perspective helps in identifying genuine financial issues rather than assumed ones.
In this episode, I guide viewers through conducting their own financial audit using my three-month money tracker to separate emotions from facts and gain a clear understanding of their finances. The Three-Month Money Tracker provides a structured approach to identify spending and saving habits by observing the flow of money over a concise period. This practical tool helps user’s separate feelings of financial distress from the genuine state of their financial affairs. By analysing these patterns, individuals gain insights into potential areas for financial improvement, opening the possibility for better money management and more balanced living.
The Three-Month Money Tracker
The Three-Month Money Tracker is a straightforward approach for taking control of personal finances. This method aims to help individuals separate their emotional responses to money from the factual details of their income and expenses by focusing on the numbers without judgment. By examining three consecutive months of financial activity side by side, trends and patterns become much clearer.
To begin this process, record earnings, spending, and savings for each month. This involves noting all sources of income first, such as salary or any other earnings. Then itemize fixed expenses like mortgage or rent, utilities, insurance, and other recurring payments. Variable expenses, such as groceries or entertainment, should follow. This clear distinction between types of expenditures can help highlight where adjustments might be needed.
For consistent tracking, begin with the most recent month that has just concluded. For example, if you’re starting in October, you should first review and input data from September. This exercise encourages looking beyond a single month’s cash flow, accounting for months with income or additional expenses due to events like holidays.
Start by evaluating income, before dissecting your major regular bills like your mortgage or rent, power, water, and phone services. Car payments and subscriptions might be lumped into one category for brevity, although listing them separately could offer more clarity if desired. Using an automated calculator within the tracker can make this easier, offering tangible insights without the need for advanced numerical skills.
Ultimately, this tracker serves as a tool to address financial concerns objectively, promoting awareness and informed decision-making over time.
Addressing the Audit Process
Embarking on a financial audit involves setting aside traditional budgeting methods. Instead, focus on understanding the emotional aspects of money management. Many feel stress and overwhelm due to misunderstandings about their financial state, which may not represent the actual situation.
A practical starting point is to utilize the three-month money tracker. This tool prompts you to answer three basic questions: What did you make? What did you spend? What was left over? Tackling these questions without judgment will provide clarity.
Steps for the Three-Month Money Tracker:
- Analyse Monthly Income: Begin by determining the total income for each month. For instance, combine the earnings of all household members.
- Examine Expenses: Divide spending into fixed and variable categories. For fixed expenses, list items such as mortgage, utilities, car payments, and insurance. For variable costs, consider discretionary spending like dining out and entertainment.
- Calculate Remaining Balance: Subtract the total expenditures from the total income to see what remains.
When using this approach, consider the variability between months. Some months may include extra pay checks or irregular expenses, significantly affecting cash flow. Thus, comparing consecutive months provides a fuller picture of financial patterns.
Common Myths About Managing Money
One common myth in personal finance is the belief that budgeting is the ultimate solution to financial issues. Many individuals experience stress and confusion when budgeting, often feeling like they can’t manage their finances
Another misconception is that spending is always the root of financial problems, especially among women. In many cases, the issue may not be excess spending but rather insufficient income. A thorough financial review can help identify the real issue, enabling more informed decisions.
Couples often think each other is the source of financial troubles, assuming their partner’s spending habits are causing the issue. However, a systematic audit can reveal that the perceived problem might stem from another area, promoting better financial harmony.
The importance of understanding cash flow is sometimes overlooked. Tracking income and expenses over three months can provide a clear picture of one’s financial situation, far beyond what a regular budgeting app can offer. This process helps differentiate between fixed and variable expenses, allowing for better management and strategic adjustments.
December is frequently excluded from such analyses because it’s seen as an anomaly due to holiday spending. It’s crucial to incorporate it into regular tracking since it occurs annually and affects overall financial trends. This approach helps prepare for fluctuations and informs more accurate financial planning.
The Significance of Cash Flow Management in Budgeting
Understanding cash flow is essential for effective personal budgeting. Focusing on the actual numbers rather than feelings helps achieve this. One effective way to assess cash flow is by using a three-month money tracker. This tool allows individuals to observe their income, expenditure, and what’s left each month, providing a clearer financial picture.
The tracking process begins by noting monthly earnings. For example, if one partner earns $5,000 and the other earns the same, the combined income would be $10,000. Tracking expenses is divided into fixed and variable categories. Fixed expenses might include a mortgage of $2,500, a power bill of $250, and other essential payments like insurance and utility bills. Individuals can adjust these categories based on their specific situations.
Using a table format simplifies the comparison of these expenses and helps in identifying trends.
After accurately logging these figures, people can make informed decisions about changes needed in their lifestyle or spending habits. Properly managing cash flow allows for anticipations about upcoming financial demands, ultimately creating a more balanced and stress-free approach to budgeting.
Practical Steps to Begin a Financial Audit
Beginning a financial audit involves assessing income, expenses, and savings over a three-month period to understand financial patterns. Start without judgment and focus on the facts—how much was earned, spent, and saved each month. Use a simple tracker to visualize these figures side by side.
- Identify Monthly Income: Begin by determining total income for each month. Include all income sources, such as wages or other earnings. Calculate the combined total if there are multiple income sources within a household.
- Record Fixed Expenses: Evaluate and list all fixed monthly expenses. Fixed expenses generally include costs like mortgage or rent, utility bills, and phone bills. Gather the figures for each of these categories to form a comprehensive picture of fixed spending.
- Consider Variable Expenses: Track variable monthly expenditures, such as groceries and entertainment. These expenses can change from month to month, so monitoring them closely is crucial to understand overall spending habits.
- Calculate Net Savings: Subtract the total monthly expenditures from total monthly income to ascertain what is left over. This figure represents net savings and offers insight into the financial health and room for adjustments.
- Compare Across Three Months: Place these data points side by side for three months to analyse trends. This comparison can highlight seasonal spending spikes or dips in income, helping to guide future financial decisions. Adjust the relevant categories to align more closely with financial goals, ensuring spending aligns with priorities.
Fixed and Variable Costs
In examining personal finances, it’s helpful to categorize expenditures into fixed costs and variable costs. Fixed costs typically remain constant each month. These might include mortgage or rent payments, for example, a $2,500 monthly mortgage. Utility bills such as electricity and water are also considered fixed expenses, with values such as $250 for electricity and $80 for water being common examples. Additional fixed expenses often encompass phone bills, insurance payments, and any recurring subscriptions, which collectively could average around $100 monthly.
Variable costs, on the other hand, fluctuate based on consumption and lifestyle choices. These could include grocery bills, dining out, entertainment, and other discretionary spending. By scrutinizing these expenditures over a three-month period, individuals can ascertain spending patterns.
Evaluating both categories over a set timeframe provides a clearer picture of cash flow. This methodical approach highlights the interplay between what one earns, spends, and saves. It allows individuals to make informed adjustments to both fixed and variable costs as needed. Through careful tracking, financial decisions can be tailored to improve stability and reduce any underlying financial stress.
Establishing a Supportive Environment
Creating a safe space to explore financial emotions can be beneficial. Engaging with others’ stories through podcasts or discussions can normalize feelings of financial stress. It’s essential for individuals to realize that they are not alone in these experiences. That’s why it’s important to find a community that discuss what you need with support and understanding. Join the Stop Budgeting Community.
Key Takeaways
- Conducting a financial audit helps clarify income versus expenditures.
- Understanding the emotional aspects of money is crucial for effective financial management.
- A straightforward tracking method simplifies the process of financial evaluation.