Repetitive scrutiny injury should be the number one factor behind the early retirement of accountants. My colleagues and I are used to hearing jokes about our profession – but on the other hand, we could be in human resources!
Yet accountants perform a vital task, one that has been honed over centuries. They certify the financial affairs of a business, create narratives from which the nature of an operation can be understood and suggest and lead the changes that are required to ensure long-term health for the collective good.
Each month, millions of financial information packs are created and pored over globally. Sometimes large organisations dispatch internal auditors to review processes and results, while once a year external auditors examine landfills of business records to ensure accuracy and compliance.
Most employees are affected by this annual process in some manner – so why is this fundamental checkup not brought home? If regular audits of the organisations that employ many of us are seen as beneficial then why do we not apply the same process to our personal finances?
An audit process may appear like overkill but at its core it represents a straightforward stepwise process that can in a simplified form become a useful barometer with which to measure your personal wealth.
In performing a personal audit the goal should be to achieve a level of knowledge of one's finances by understanding the individual components that constitute the asset base. These must include any recent events and legal changes that a financial professional would glean from a cursory review of documents provided to them and that they would feel have a material effect on the opening valuation.
Any audit assumes that records have been kept even if they are incomplete. Missing statements can always be sought from the issuer and, unlike in the past when charges were often as much as Dh5 a page, these should now be available for free via the internet.
Two lever arch folders and a pack of plastic wallets should be enough to hold current records for the majority of people.
Put your household bills in one folder and bank and asset information in the other. You are required by law to keep financial records for five years in the United Kingdom and seven years in the United States. As Dubai does not charge tax, there is no legal requirement to keep records; but since all expats come from somewhere where the law may be different, it is a good habit to acquire.
This does not require much work given that the average family receives on average one relevant document a day. Be rigorous. Those couple of minutes of general housekeeping a week will pay handsome returns when you need information urgently. Do not fall into the trap of not opening mail regardless of what you feel it may contain.
Once you have all the papers you need you can embark on the six stages of your personal audit, as laid out below.
Prepare For A Financial Health Check
Treat your annual financial checkup as you would one for health. Human nature being what it is, the results are very often less than well received.
Who wants to know what they are truly worth? Even if you do, can you distinguish between tangible and intangible assets and understand volatility?
Be honest with yourself and by default those who depend on you, directly or indirectly. Do not be afraid to ask for advice or help. Indeed, even when things are going well a second opinion may improve the situation even further.
Any honest reflection, about health or wealth, should be taken seriously. Today's minor symptom is tomorrow's serious condition for many.
Be prepared by putting in place a personal programme to measure and manage your finances.
Taking Stock
- Assess the financial risks that you are facing.
- Identify and review all contact and security check information relating to each asset. Seek out such information in case a loved one passes away unexpectedly.
- Ensure all standard reports, where relevant, have been received over the year. If you are not getting them, who is?
- Note any significant changes to the nature of an asset that may affect its value. A high-end supermarket opening near your home may suggest a rise in local property prices.
- Are there events or actions taken in the previous year that could either be favourably replicated or should be avoided for another or future asset? Sometimes that change was down to nothing more than luck, good or bad.
- Evaluate trends in the economy that might reduce the value of assets at the point you plan to dispose them of. The beginning of a rising interest rate cycle suggests sluggish stock exchange performance.
Categorise Your Finances
- Identify expenditure in broad categories.
- Separate out your assets by type.
- Identify how long you plan to hold on to assets.
- If you don't know what they were worth a year ago, work that out first.
- Calculate their current values.
Try A Test Run
- Professionals know the boundaries of their knowledge so they will be aware that previous stages will have been completed with varying degrees of imperfect knowledge. Use a financial adviser as a peer review, or to lead the process.
- In the forthcoming year pick one or two dates where planned actions are revisited. Early corrective action minimises losses.
- When national government budgets are announced you should review your position, focusing on any changes. Technical changes are followed by weeks spent clarifying rules, so wait and then seek professional advice.
Plan Of Action
- Take each asset in turn and decide what action, if any, should be taken over the following year. Action can mean doing nothing.
- Using excess wealth or through leverage, identify investment opportunities, leaving aside a buffer for any unexpected expenditure such as family, tax related, and so on.
- Agree a "second set of eyes" approach so decisions are reviewed. Mistakes happen, the obvious is rarely so.
- Revisit the assessment of risks. What could have been done to avoid any of them?
Reporting And Communication
- Write up the decisions you made – this will remove uncertainty risk.
- Use software tools to create a summary table representing the outcomes of potential scenarios. No one likes surprises.
- Face outcomes with integrity when reporting back to family members.
Nothing breeds a stormy atmosphere like poor results and the assignment of blame.
PERFECT PACKAGES
Many software packages can help you understand your financial habits, though this requires a degree of daily diligence that many may consider somewhere between the excessive and the nerdy.
Microsoft Money is a solid product in this range, though most should be able to manage perfectly well with Excel or a similar spreadsheet product.
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