Have you taken a look at your financial health lately? According to Investopedia, “financial health” refers to the state of your personal finances. This term encompasses all your activities and decisions on money. It also includes the following:
- the types of expenses you have and how much money goes to them
- saving methods for your future retirement
- debt management
- investments and other sources of income
How you manage your personal finances today will impact your future quality of life.
You can’t ignore this fact anymore.
The task of improving the health of your financial health may seem difficult. But you can always start with small, doable steps.
Learn how to take control of your finances and improve your financial health using the following ways:
# 1 Calculate your Net Worth
You cannot improve your financial health without understanding it first.
To understand the current state of your personal finances, calculate your net worth.
Net worth – This is the amount after you subtract your liabilities (what you owe)from your assets (what you own)
Examples of Assets:
- Mutual funds
- Bank deposits
- Real estate
- Other items that have a monetary value.
Examples of Liabilities:
- Accrued expenses
- Accounts payable
- Taxes payable
- Accounts payable.
Make sure to calculate your net worth regularly (e.g. yearly) because this figure may change over time.
Knowing your net worth gives you an overview of your finances and answers questions like:
- Have you added to your wealth after a year?
- Have you saved enough given your age and work years?
- What are the things you can improve on spending and saving?
# 2 Create a personal budget/spending plan
The spending plan aims to project all your expenses and income at a given period (e.g. monthly or quarterly).
One main goal of this plan is to check whether you are saving enough based on your current income and expenses. It can help you focus on expenses, spend on necessities, plan for savings.
Income does not only count salary or wage but can also include monetary sources like:
- Child support
- Rent income
Expenses can include:
- Food, transport
- Loan payments (car, insurance, credit card, student loan)
- Education (tuition, books,)
- Mortgage or rent
- Special events.
Subtract your projected expenses from your income. If you have money left, then you are in a good position to save and invest. But, if your expenses exceed income, you have two solutions:
- Reduce your expenses.
- Increase your income. This can mean working more hours or getting a second job.
Try to reduce expenses first by prioritizing them. Sort the essential expenses from the nonessential ones ( entertainment, clothing, restaurants, and leisure). Be ready to reduce or cut these expenses.
# 3 Stick to the plan and control your lifestyle
It is not enough to list expenses and income, and make adjustments on paper! You need to stick to your spending plan!
The desire to match other people’s spending habits can derail your budget plan. You may feel the social pressure to buy things or do activities like your friends and family. But remember that their financial status and goals may not be like yours.
Be mentally strong. Say ‘no’ if you don’t have the budget to buy a new phone, or go to a fancy restaurant to fit in or please a peer.
Many people want to project a wealthy image but they may be living from paycheck to paycheck or in serious debt.
# 4 Avoid more debts and choose an effective debt repayment strategy
Sinking yourself in continuous debt will keep your financial health from improving. Some people pay loans without examining and adopting efficient ways to reduce them.
Less debt and more efficient loan repayment schemes will improve your finances.
As much as possible, make cash payments for most purchases. This is especially important when you already have taken out large loans.
Review your total debts every year and choose a strategy to repay them. Here are the recommended ones:
Avalanche Method – involves focusing on the high-interest debts first. You still need to make minimum payments on all your debts. But you should put extra money towards debt with the highest interest. Once you settle this debt, continue to the next high-interest debt.
Snowball Method – prescribes directing more money to pay off the smallest debt first. For this method, you should still pay the least amount on all loans.
Experts recommend this strategy to build psychological momentum. The idea is the debtor needs to start small to avoid feeling overwhelmed and intimidated. As you settle one small debt after another, you build the confidence and the habit to keep on paying off.
#5 Manage and review your investments
For a better financial outlook, do not rely on salary and wages alone. Saving is a great way to increase wealth but it is not the only one.
As you may have heard, investments will help increase your wealth faster. You may have invested in stocks, bonds, or mutual funds but don’t think you are all set because you have them.
Even if you have a fund manager, it is important to review your portfolio on your own. Track the growth of each investment. Check if they are performing as expected? Work with your fund manager to make asset allocation adjustments to maximize returns.
Your investment portfolio must consider your age and level of risk exposure. For example, you may not mind high risk by high-return investments at a younger age. But that is not the case if you’re close to retirement.
You may not feel savvy enough on investments, but it’s a mistake to rely on your fund manager or bank. If you need to study the basics first, then do it! The one person who has your best financial interest at heart is you.
You can apply the tips mentioned not only but also to raise financially responsible kids. The bottom line is it takes time and effort to improve your financial health. Establish financial goals to see the big picture. Build healthy habits towards short-term financial choices. Without solid habits and a strong mindset, it will be hard to follow personal finance tips and rules.