What is Financial Health?
Financial health refers to the overall state of your monetary affairs. It’s your ability to manage earnings, expenses, debts, wealth, and fiscal shocks. There are various ways to create financial health, including savings, retirement plans, and planning how you spend your income. If you can comfortably handle unexpected financial emergencies as well as short- and long-term needs, then your financial health is positive.
Good financial health has several benefits. According to the APA, a majority of stressed individuals mention money as the cause of their discomfort. Financial wellness reduces or eliminates stress and associated problems such as depression, weight gain, erratic sleep patterns, and heart disease. It significantly improves your personal and professional relationships. Other benefits include providing you with more lifestyle options, creating financial stability for your children, and allowing you to give back to your community.
Signs of Financial Health
The most trustworthy way to gauge financial health is to measure savings, debt, and net worth. Since they’re not constant, it’s advisable to do so regularly. A steady source of income increases the likelihood of financial wellness. Having multiple revenue streams reduces the impact of financial surprises and gives you room to create a comfortable budget.
Another sign of financial health is the ability to reduce or maintain the same level of expenses while increasing your income. More money means you can save more, as well as enjoy a higher quality of life in the future. One way of doing so is to focus on building your career, which results in better-paying positions and overall financial security.
Besides increasing contributions to your 401(k) and other retirement plans, you can also diversify your income. High return ideas include part-time freelancing or consulting, investing in real estate, re-selling, and affiliate marketing.
How to Improve
The first step to improving your financial health is to evaluate your current status. You should have a realistic view of your income, expenses, and debts. Follow these tips:
1. Create a budget
A budget is the most basic and valuable tool for financial discipline. Individuals, companies, and even countries use it to guide their spending. For it to be effective, you must consider your current financial habits before planning for the future. It gives you a clear picture of items you must spend on, including rent, taxes, groceries, and household maintenance. You can also do away with discretionary expenses such as vacations, fine dining, electronics, and subscriptions that you no longer need.
2. Have an Emergency Fund
Financial emergencies include job loss, illness, car trouble, natural calamities, and the death of a loved one. Although no one wishes for them, you must prepare for their eventuality. Your emergency fund should have enough money to cover living expenses for three to six months.
3. Reduce or Clear Your Debt
There are two effective debt reduction methods you can use. The first is the avalanche method, which gives priority to the debt with the highest interest rate. Once complete, pay off the next highest one until you clear it all. The second method is known as the snowball method, in which you pay off the smallest debt as fast as you can. Once done, move these payments to the next smallest debt until you are debt-free.
4. Automate Your Savings
Arrange for your bank to automatically split your paycheck every month, then move a fixed amount from your checking to a savings account. Utilize whatever remains to cover your monthly needs.
Tracking Your Progress
You can use spreadsheets to evaluate whether you’re meeting your financial goals. Create a category for each fund and ensure each entry is within your budget. If you find spreadsheets too time-consuming, there are several apps you can download on your mobile devices.
These apps can also track your FICO score through TransUnion, Experian, or Equifax. Other financial benchmarks to analyze are your net worth and savings rate. At the end of each month, quarter, or year, you’ll accurately see whether you’re on track to achieve your financial goals.
Learning to Maintain a Positive Financial Attitude
The tips outlined in this article don’t come naturally to most people. You have to dedicate a significant amount of time and effort before seeing positive results. Study the most effective money-saving strategies and implement the ones you find most suitable. Fine-tune them until you find a winning formula.
Find a mentor who’s enjoying success and let them guide you on improving your financial health. You’ll need the support of your family, friends, and the broader community to achieve your long-term objectives. It won’t be easy to enforce financial discipline without their encouragement. Over time, these collective actions will form a culture that future generations will find easier to maintain.
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Renee C. Law, MST, CPA | 12/08/2020