Imagine that you have enough money to cover your regular expenses, you can bear financial setbacks easily, don't deny yourself the pleasures of life, and can still save for the future. If so, you’re in good financial health.
If you can't say that about yourself and get stressed when thinking of money matters, it's time to think over your financial health. This article will help you with it and explain:
- How financial stress can (negatively) affect your quality of life
- How to determine your financial health by asking yourself a few simple questions,
- What rules you need to follow to get your finances in order, and
- How to improve your financial situation.
What is Financial Health?
Financial health, by definition, is the state of an individual’s personal financial situation. It includes various aspects such as your income, savings, expenses, and investments. Your financial health can be influenced by factors beyond your control. Such factors include the inflation rate and available employment opportunities.
In addition, financial health can be seen as a reflection of an individual’s financial wellness [1]. The question, “How am I doing financially?” is a common concern for most people; however, they are reluctant to find the answer due to a lack of credible knowledge. Some of the questions that will help you determine your financial position include the following:
- Am I able to pay my bills?
- Do I have any debts?
- Can I save for the future?
- What is my net worth?
- How to do finances in my particular situation?
Documenting earnings and expenses can help improve financial health
The Impact Of Financial Stress
Not being able to cover your monthly expenses and living from one paycheck to the next is a common concern that most people have. Such concerns can often lead to stress about their ability to manage expenses. Research [2] has shown that financial stress can also lead to physical problems, including headaches, sleep problems, and heart diseases. However, there are various rules that can help improve financial health.
Financial stress can be caused by various factors that negatively impact an individual’s financial well-being. Some of these factors include:
- Loss of income.
- Not being able to pay off debts.
- Not being able to cover expenses due to price increases.
Being concerned about your financial well-being indicates that you have a proactive approach to life. However, such concerns can be troublesome if they begin to disrupt your daily life.
A recent survey [3] has shown that 58% of Europeans believe rising prices are a significant worry for them. In addition, seven out of every ten respondents from the UK have also named price increases as a top concern. Financial stress can negatively impact both physical and mental health. In severe cases, it can lead to anxiety, intentional withdrawal from social activities, and even depression. Various factors, such as inflation, that can influence a person’s financial health are beyond their control. Therefore, most people resort to increasing savings and multiplying avenues of income to improve their financial health.
Some of the necessary actions to take for it include:
- Making a budget, categorising expenses appropriately
- Spending less than your income,
- Reducing luxury expenses
- Searching for affordable produce
- Diversifying investments among bonds, stock, and money market funds to increase potential profits.
Let's now look at ways to improve financial health in more detail.
Actions That Could Improve Your Financial Health?
Most people often think that improving financial health is challenging. However, adopting some very essential healthy financial habits, such as keeping track of your expenses and increasing your savings, can help you cope with this task. Some of the actions that will enable you to do this are:
1. Create a budget that works for you
When creating a budget, it is important to use the after-tax income as the amount of money available to cover costs. In addition, all expenses listed within the budget must be classified appropriately.
Common categories for expenses include necessities, bills, credit card payments, debt payments, mortgages, and quarterly and annually occurring expenses. Subtracting the cost of expenses from the income will help identify the remaining amount for each month.
This amount can be used as savings or an investment. Implementing a budget will help you keep track of your expenses and will allow you to work towards goals. Although developing a budget is a great first step, it’s important to stay committed to the budget and keep track of your spending.
Creating a budget helps keep track of your expenses
2. Recognise needs vs wants
Separating needs and wants is one of the most challenging things to do because they vary from person to person. Needs basically encompass all the things that are necessary for life. Some of these include food, clothes, health care, rent, and transport.
Wants are things that aren’t necessary but that a person enjoys having. Some of them include dining out, going to the movies, and buying the latest tech products. People often misclassify wants as needs because they assume these things are necessary.
Differentiating between needs and wants helps reduce expenses, increase savings, and improve financial health. Needs, being a necessity, and wants, being centred on improving the quality of life, are the core differences people can use to separate the two and achieve healthy finances.
3. Spend less than you earn
Spending less than your income is one of the most common financial health tips that most people have heard. Living by this rule is quite challenging, simply because overspending is a habit that’s hard to break.
People earning a salary spend with the mindset that their fixed income will cover their expenses, and they’ll spend less next time. In addition, using credit cards to buy now and pay later also makes getting rid of overspending harder than it is.
However, adopting a cash-only approach is an easy and quick fix that can help people spend less than they earn. Things like searching for affordable alternatives, cutting back on luxuries, and making a list of required expenses can also help reduce spending and improve financial health.
4. Try to save money regularly
Saving money helps people achieve healthy long-term finances
Saving money is one of the best healthy financial habits that people should adopt. However, people often find it challenging to implement this habit into their lifestyle. Common reasons that make saving money difficult include a lack of financial literacy and procrastination.
However, there are many ways to save money [4] and have healthy finances. Individuals looking to save money should start by clearing their debts first. This will allow them to have extra money left over for savings.
After clearing the debt, other tiny things like cancelling unused subscriptions and using cashback coupons and gift cards can also help save money regularly. People who want to improve their financial health can begin saving money anytime, but it’s better to start sooner than later.
5. Start saving early
Most people often hesitate to save money because they believe that they don’t earn enough to do so. Saving early is highly important because it can help set up an emergency fund and allow you to retire knowing that the expenses will be taken care of. Doing it, you’ll become one of the financial health examples.
In addition, beginning to save at an early age allows people to have more money for investment, allowing them to take advantage of compound interest [5]. Although initial savings might be low, they can help people build momentum and allow them to work towards their wealth.
Starting to save at an early age also allows individuals to become more responsible about their spending habits. This effect then transitions throughout their lives, allowing them to differentiate between needs and wants and remain committed to their budget.
6. Set aside emergency cash
Setting aside cash for an emergency fund is one of the most essential healthy financial habits that can improve a person's overall financial position. Having an emergency fund is helpful as it allows individuals to cover unplanned expenses and deal with uncertain life events.
As mentioned, some factors that dictate a person’s financial well-being are beyond their control. An emergency fund allows people to limit the effect of these factors on their current financial position. The money saved from reducing expenses can be utilised for the emergency fund.
When determining the amount to have in an emergency fund, an individual should look at the cost of previous unexpected events they have gone through. In general, an emergency fund should have enough to cover up to six months of expenses.
7. Invest
Investing to earn more money is a significant step that can improve financial health. It allows individuals to earn passive income, which can be used to support their long-term financial goals. Three main types of investments include stocks, bonds, and cash equivalents.
Buying stocks allows individuals to earn money through dividend payments or by reselling the stocks at a higher price. Bonds allow individuals to earn regular interest payments and receive the initial amount back after a predefined time period.
Cash equivalent investments include savings and money market accounts [6]. These investments allow individuals to earn interest on the deposited amount and have access to it. As a general rule, the amount should be invested in all three as it increases the potential profits.
Investment diversification increases sustainable profits and reduces risk
8. Review your insurance
An insurance review is when an individual takes a look at all the insurance coverage and payment options that they currently have. Home, vehicle, and life insurance are some of the most common types of insurance that individuals have.
It’s best to review all the insurance policies an individual has and create a one-page summary of each policy. When conducting the review, it’s important to ensure that the summary includes the policy name and number, insurance carrier, premium payment and benefits, and beneficiaries.
Reviewing insurance will help determine the extent of protection for assets and family members in the case of an unexpected catastrophe. In addition, it will also help identify the amount of money that is currently being paid for the protection.
9. Check if you can get a better deal with your providers
Talking to insurance providers to optimise insurance coverage and payments can significantly improve financial health. Most people often think that they have the insurance premium the provider requires. However, that’s not true.
There are many ways individuals can save money on insurance. One of the most common things to do to get a better deal is to buy multiple insurance policies from the same provider. This allows providers to reduce costs and save time which enables them to give buyers a discount.
In addition, a low-risk profile can also help individuals get a better deal on insurance. A good driving record, good credit score, and little to no debt make an individual an attractive risk for insurance companies, resulting in low premium costs.
10. Don’t be afraid to seek financial assistance
Seeking financial assistance is a great step towards healthy finances. Understanding how to reduce expenses, save, and invest simultaneously can be a bit challenging. However, seeking help from financial experts allows individuals to get valuable and actionable advice.
Some of the main reasons to seek assistance from a financial advisor include help with budgeting or investing, developing an estate plan, or taking care of taxes. Financial advisors charge fixed or hourly rates; the exact cost depends on the required services.
However, financial advisors aren’t the only source of assistance an individual can get. Financial advice can be taken from family and friends. When doing so, those seeking advice must explain their current position and efforts thus far and overall, it is a good way to learn how to improve your finances.
Seeking financial assistance helps develop a better understanding of personal cash flow
11. Set financial goals
Setting goals and working towards them is a great way to achieve good financial health. Financial goals must be categorised as either short, mid, or long-term. Short-term goals are those that can be achieved in around a year or two.
However, mid-term goals are those that may require around three to five years. Financial goals that need more than five years to achieve our long-term goals. Short-term financial goals include things like setting up an emergency fund, which can be achieved through savings.
Whereas mid-term goals might include things like making a down payment on a house. These can be achieved with saving, however, it may require an individual to invest. Long-term goals are things like paying for the college tuition of one’s children or paying off a mortgage which generally require investment.
12. Plan for major purchases
Planning for major purchases ahead of time is essential to having healthy finances as it allows individuals to account for the money ahead of time. Some of the most common examples of major purchases include buying a house or a new car.
When planning for major purposes, it’s essential to calculate the exact amount that’s required. After determining the amount, the purchase can be classified as either a mid or long-term goal depending on the savings and investment needed to achieve it.
Individuals often face the temptation to tap into funds they save for long-term goals. However, this can be avoided by setting up a separate savings account. In addition, individuals can also set up automatic deposits tied to their paychecks to ensure regular contributions.
13. Keep financial records
Keeping financial records can help individuals remain committed to their goals and can also help pay for necessary expenses on time. Some of the many documents that should be included in financial records are paychecks, utility bills, bank statements, and tax returns.
Maintaining your financial records allows individuals to monitor expenses, helps identify spending habits, and better understand how to improve finances. This information can then be used to reduce unnecessary costs and increase savings and investments.
In addition, it also allows individuals to forecast their expenses for the future, which increases their ability to cope with unexpected events. Furthermore, these records are also a source of motivation as they highlight past achievements.
Financial records help monitor expenses and identify incompetent spending habits
14. Use a debt reduction strategy if you have high-interest debt
High-interest debt is any debt with an interest rate of more than 6%. Such debts often have a negative impact on healthy finances. However, individuals facing such debt can use a debt reduction strategy to pay it off.
A debt reduction strategy is a systematic approach that allows individuals to pay existing debt and requires that no additional loans be taken. This strategy is based on an avalanche approach [7] that entails individuals paying off debt with the highest interest first.
When using such an approach, it’s important to remember that minimum payments on all debts must be made on a regular basis. The amount left over after making these payments should be used to pay off the debt with the highest interest.
15. Track and stick to your budget
The last and most crucial step for achieving good financial health is to make sure that your spending is aligned with your budget on a regular basis. This allows individuals to ensure they are not drifting off track with their spending.
Following a budget on a regular basis is quite tricky if amounts are not allocated appropriately. These exact amounts for needs, wants, savings, and investments vary from one person to another depending on their income and expenses.
However, as a general rule, 50% of an individual’s income should account for the needs and other necessary expenses. 30% of their income should be used for saving, debt payments or investments. The remaining 20% can be used for expenses that improve the quality of life.
Summary
Those who work to earn a living are often concerned about their financial health and question their ability to cover current and future expenses. Taking steps to improve financial health can often be challenging without adequate knowledge. Some of the financial health tips that can help you improve your financial position include making a budget, paying off debt, and investing towards your goals.
Frequently Asked Questions
How to improve financial health?
Improving financial health is quite challenging without adequate knowledge. To improve financial health, you must first determine your current financial position. This can be done by measuring your income, expenses, savings and investments. After this, various measures such as developing a budget, planning major purchases, and setting financial goals can help improve financial health.
What should I do if I need help with finance?
If you need help with finance, our blog has a lot of great information about savings, investments, personal finance and other similar topics. You can also reach out to financial advisors for further assistance if you need help developing a budget, creating an investment plan, paying off debt, or other actions to improve personal financial health.
Is there a general rule for budgeting I can follow?
Although budgeting depends on your income and expenses, it can be generally done as follows:
- 50% of income for needs.
- 30% for savings, debt, and investments.
- 20% for wants.
Where should I invest my money?
Investing money depends on your individual goals; however, investments can be made in AIF, ETF, bonds, stocks, or money market funds. Diversifying investments is a great way to increase potential profits and can help improve financial health.
List of References
- Source: Forbes
- Source: BMC
- Source: McKinsey
- Source: Forbes
- Source: Business Insider
- Source: Forbes
- Source: Business Insider