Bitpanda Money Matters #01: audit your finances

Economic events like rising inflation or fluctuating interest rates have made managing finances more crucial than ever before. Taking control of your financial situation is the first step toward building your wealth, even though it can be overwhelming with all the decisions to make and goals to set. But the good news is that, with the right approach, it does not have to be complicated. 

Let’s start with the basics: understanding where you currently stand financially . It's easy to feel overwhelmed when it comes to personal finance, but knowing where your money is going is the first step towards making it work for you. 

Why auditing your finances matters

Think of a financial audit like a health check for your wallet. To get a clear picture, it’s important to get a baseline reading of your income, expenses, savings and debts. Without this foundation, it’s hard to build a sustainable strategy. For example, if you’re spending more than you earn,or constantly juggling with debt, it can be difficult to progress. By facing your financial reality, you can identify opportunities to save, reduce unnecessary spending and make your money work (harder) for you.

How to perform an audit

Every financial audit should start by gathering your data and creating an overview of your financial situation. No matter if you are using a notebook, a budgeting app or a spreadsheet - what’s important is that you’re getting the full picture.

Here’s how to do it step-by-step:

• Gather your financial documents: Collect your bank statements, credit card bills and payslips. You’ll need this information to get a full picture of your financial situation. 
• Track your income: List all your sources of income. This includes your salary, rental income or anything else that contributes to your monthly cash flow.
• List all of your expenses: Next, list out your regular monthly expenses - rent or mortgage, utilities, groceries, insurance, subscriptions (yes, that recurring Netflix one counts too), etc. You can use budgeting tools, apps, or even a simple spreadsheet to help you track your finances.

Unsure which cashflows to include in your audit? This guide highlights key examples of income and expenses to consider, helping you capture all relevant data.

• Calculate your savings and investments: Analyse your savings accounts, retirement plans and any investments you currently have. This is important as it helps you to determine where you stand in terms of assets.
• Assess your debts: Write down any debts you have, from loans to credit card balances. Pay attention to interest rates as high-interest debt can hold back your wealth-building goals and you’ll want to prioritise paying that off.
• Analyse your spending patterns: Take a close look at your expenses and identify areas where you could cut back. Maybe you are paying for a subscription you don’t use, or you are dining out more often than you realise. By carefully reviewing your spending, you can spot where you are overspending and find opportunities to switch to more affordable alternatives. Small changes in your spending habits can make a big difference over time, freeing up money for savings and investments. 
• Use a budgeting tool: To maintain a clear overview of your finances, consider using tools specifically designed to help you manage your money effectively. These tools can assist you in tracking your spending, setting budgets, and monitoring your savings - all in one place. Whether it’s a budgeting app, a digital spreadsheet, or a notebook, the right tool can simplify the process and keep your financial goals on track.

Although this may feel like a lot of work, by getting all the data in one place, you will have clarity on your position and a better chance of long-term success. Once you see where your money goes, you will be able to make smarter choices moving forward.

Calculating your net worth 

Once you have completed your financial audit, it’s helpful to calculate your net worth. This simply means adding up everything you own (e.g.assets, savings, property etc.) and deducting your liabilities (e.g. bills, loans, credit card debt etc.). Whatever the result, you will see at a glance whether you’re saving money or if your debt is holding you back.

Putting it together

Now that you have collected your financial information, it is time to take a moment to reflect. Ask yourself:

• How much do I save each month?

• Do I have enough to cover unexpected emergencies?

• Am I spending more than I earn?

• What changes can I make in my spending habits? 

• Can I switch to more affordable alternatives?

Start the audit

Follow our step-by-step guide above to complete your financial audit. Go through each step carefully, and answer the questions to help you get a clear overview of your finances. By the end of this task, you'll have everything you need to move on to the next stage of building your wealth.

Remember, at this stage, the result is simply an outcome. The goal is to understand where you stand, allowing you to make more informed decisions on your wealth-building journey. 

What’s next?

If you have finished your audit, then you are ready to tackle next week’s article on setting SMART goals for 2025. Setting clear targets will help you focus your efforts and make next year your best financial one yet. 

In the meantime, you can explore more articles on personal finance on the Bitpanda Academy. If you are looking to gain a deeper understanding of personal finance and why it is essential, read this article that covers everything from budgeting to saving and investing and explains why understanding these aspects is crucial for financial security.

Disclaimer

This article is distributed for informational purposes, and it is not to be construed as an offer or recommendation. It does not constitute and cannot replace investment advice.

Bitpanda does not make any representations or warranties as to the accuracy and completeness of any information contained herein. 

Investing carries risks. You could lose all the money you invest.