Flourishing financial health brings a freedom that most of us long to experience. That financial freedom lets us live life to its fullest potential. By following a few simple rules, you can get on the road to top financial health, on track to reach all of your personal goals.
What is financial health?
Financial health means you have the resources you need. It means living well within your means and planning for your future. It’s your big financial picture, and the extent to which you are able to balance and manage your assets and debts.
Know your motivation
The first thing you need to do is have a vision. Think about where you want to be in five years, ten years, thirty years. If you want to own a home, drive a nice vehicle, build a retirement nest egg and breathe easy when bills arrive, you have to mentally picture these things. Before you head out to work, know what you are working towards.
Make a budget. On a daily or weekly basis, write down all of the purchases you’ve made and bills that you’ve paid. Tally them up to see where your funds go. Don’t leave anything out. Even small purchases add up over time.
For example, if you buy a latte every day at $4, that’s $20 per week and $1,040 per year. Whether you choose to keep that in your budget is your choice, but make it a conscious choice by knowing where your money goes.
After you have tracked your spending, develop a spending plan. Be honest with yourself and be prepared to make changes.
Know your net worth
It is important to know more than just how much money comes in and how much you pay out. Be aware of your net worth. Make a list of what you own and another list of what you owe. The difference gives you a clear picture of what you are worth in terms of monetary assets. Owning an expensive home or car may make you feel well off, but if the debts equal or exceed the values, you might not be doing as well as you think you are.
Likewise, if you feel like you’re spinning your wheels, it might give you a boost to find out that what you own is worth far more than what you owe.
Separate needs from wants
Being able to identify needs and wants is an essential skill of financially healthy consumers. Your needs include things like food, shelter, clothing, transportation, and health coverage. Your wants are things that you would like to have but are necessary for survival. For many consumers, the lines are blurred. You need a home to live in, but you do not need a home with three bedrooms if you live alone. Most of us need a car, but that doesn’t mean we need a new car.
Don’t worry about the Joneses
What others get is irrelevant to your financial health. It is your job to make sure that your needs are met, not to make sure that you are the best dressed person at the office.
Spend below what you can afford. Having money doesn’t mean it should be spent. If you buy what you need and cut the things you don’t, your future will thank you.
Plan for retirement decades in advance
Save for your retirement. Start now if you haven’t already. Even if you can only put a little bit away each week, always put aside a percentage of your income towards your future. Ideally, invest at least 10% of your income. Use paycheck deductions or a savings app to automate the process.
Paying off debt is a priority
Paying only the minimums on credit card debt is a financial disaster. The amount of interest that you pay could multiply what you owe by a factor of two, three or more. Paying the minimum payment will also drag out the debt for years or decades. Furthermore, carrying large balances can hurt your credit score. Keep track of your debt by monitoring your credit report, pay off the debt as quickly as you can, and earmark money for savings once you pay off balances. Get your free credit report card from Credit Sesame to see where you stand today.
Have a backup fund
Save enough money in your emergency fund to cover all of your expenses for at least six months. If you are a high earner, you should have twelve months’ expenses set aside. You never know when disaster may strike, but one thing is certain: emergencies will arise.
Benefits of being financially healthy
Many benefits come along with good financial health. You will feel more in control of your own life, be able to handle financial shocks like a job layoff or a medical emergency, you will be on the right path to retirement, and you’ll have more flexibility to make changes in life when you want to. There is really nothing like being the captain of your own ship and financial health is the road you take to get there.
Only you can plan for your future. While it can be tempting to look wealthy now, happiness comes from financial freedom.