The average individual earns, spends and saves. These are the three primary ways in which money is circulated in and out of households on an everyday basis. Some people, mostly under the self-employed category, often keep an informal account of their earnings and expenses on a monthly basis. Meanwhile, salaried employees generally don’t partake of this exercise and only circle back to take a good look at their finances when the taxpaying time comes knocking along.

Failing to take a closer look at your finances could throw some unpleasant financial surprises your way. To get a better sense of your financial worth, it’s essential to perform a financial audit on your own self.
Learning to audit your finances each year is an essential life skill. Let’s look at why this exercise is vital.

It helps you keep your life goals on track

Over the course of your life, you’ll have many short-term and long-term life goals. For instance, your short-term life goals could include saving up for a down payment on a car or having minor home improvements done. Your long-term goals could include saving for your child’s higher education or for your retirement.

Auditing your finances annually can help you understand how far along you are on the path to achieving those goals and how much you have left to go.

Keeps a check on extra spending

Preparing a budget and verifying how you’ve adhered to it are important aspects of self-audit. In most cases, if you’re a disciplined spender, you’ll find it easy to keep your outlays in check.

However, occasionally, you could cross the line and spend more than you planned to. This is particularly true if you don’t track your spending habits. With a self-audit plan in place, you can check extra spending and curb these outlays in time before the expenses cost you your savings or investments and get in the way of you achieving your life goals.

You can avoid financial crises and debt traps

In March 2020, Indian household debt stood at Rs 43.5 trillion, according to data from RBI, reaching an all-time high over the past decade.

While not all debt is financially damaging, it's vital to ensure that you don’t fall into a debt trap, where you become unable to repay your borrowings. Self-auditing your financial situation periodically can help you here as it ensures that you’re constantly aware of how much debt remains to be repaid.

It improves your general well-being and mental peace

Even if you’re a cautious spender without any debt gnawing at your earnings, you can still benefit from performing financial audits on yourself. For instance, this exercise can help you take stock of how you are investing your savings.

It also gives you some reassurance that your financial situation appears healthy, thereby improving your peace of mind. With the knowledge that you are in a position to competently tackle essential and emergency expenses in the future and achieve your life goals without any trouble, you can take solace in your financial well-being.

The primary aim of self-audit is to help improve your self worth over time. This is why it’s important that you don’t stop with merely identifying weak links in your financial situation. You need to actively make efforts to close these gaps by improving your financial literacy, adopting the right financial strategies and securing your current as well as your future income to the maximum extent possible.

The writer is chief distribution officer-institutional, Bajaj Allianz Life Insurance