How to Manage Your Financial Health
March 26, 2021 by Daniel Azzoli
When you think of your financial health, a lot of different things may come to mind. You might start to consider how you spend your money, or maybe you immediately think of your budget. You might even start to consider your goals for the future and what role your finances are going to play in helping you achieve them. The truth is, all of these things (and more) directly relate to the health of your financial situation. In the end, any decisions you make that have anything to do with your finances are going to influence your financial stability and health one way or another.
So, what guides your financial decisions? Maybe you’ve come across different financial rules of thumb over the years like “spend 10-15% of your budget on food” or “pay yourself first”. While some of these rules may be sensible and useful, they don’t necessarily give you a holistic plan for your spending or guide you on exactly how to incorporate healthy financial habits into your life.
While the thought of diving into your overall financial health may seem daunting, making sure you’re working towards financial stability is essential to achieving your financial goals. Today, we’re going to go over five important things to consider in order to maintain your financial health.
What is Financial Health?
Your financial health is very much what it sounds like. It’s essentially the state of your current financial standing. Like we’ve mentioned, there are a lot of different components that contribute to your financial health. These can include things like:
- How much money you have in your savings account
- How much money you’ve contributed towards your retirement
- How many financial assets you have and how much they’re worth
- How much money you’re spending on your essential needs
- How much debt you have
While there may be some general guidelines that are meant to give you some insights into how financially stable your current situation is, the truth is that everybody’s situation is unique. There’s no one-size-fits-all way to achieve financial stability, and because of this, it’s important to define your financial goals, figure out a way to achieve them, and determine what financial health looks like for you. You also want to make sure you’re not in a position where a single unexpected expense can derail your entire budget.
5 Ways to Improve Your Financial Stability
Now that we’ve painted a bit of a clearer picture of what financial health actually means, we’re going to go over some things you can do that could help to improve your financial situation and some things you’re going to want to avoid in order to keep things running smoothly.
1. Put Together a Better Financial Plan
When you’re trying to get your financial situation in order, a lot of what’s going to determine your success or failure in reaching your goals is whether or not you have a plan in place to guide you to the finish line. After all, you’re not going to wake up one day and have magically achieved all of your financial goals without having any idea of how you got there.
Even if you have a loose idea of what you want to do with your money sketched out in your head, that may not be good enough. You’re going to need to invest time and effort into putting together a thorough financial plan that works for you. To do that, you’ll need to do things like:
- Clearly define and write down your financial goals
- Ask yourself the important questions like, “how much debt do I currently have?” and, “how is my income going to change over the next few years?”
- Track your progress and break your goals down into small increments
If you want to learn more about how to put together a financial plan, take a look at this guide.
2. Create an Emergency Fund
One of the most important components of making sure you’re in a financially stable place is by making sure you have an emergency fund at the ready. This is simply money that you’ve put aside to help you handle any emergency expenses that may come your way. These could include things like:
- Emergency car repairs
- Essential home repairs
- Unexpected medical expenses
When you do a quick Google search to figure out how much money you should have set aside for emergencies, the rule of thumb you may come across is to aim to have six months’ worth of living expenses in your emergency fund. But like we’ve already stressed, everyone’s situation is going to be different.
For example, if you’re a freelancer with fairly inconsistent income and employment, you may want to err on the side of caution and aim for nine to twelve months’ worth of living expenses. On the other end of the spectrum, if you’re in a dual income household and you and your partner have healthy and stable employment, you may be fine with three months. It can also simply come down to your comfort level. You might have plenty of money coming in and aren’t insecure about your employment status, but you know you won’t feel at ease until you have at least a years’ worth of living expenses set aside. In the end, it’s important to figure out what you’re comfortable with so you have a number to aim at.
It’s also important to remember that putting together an emergency fund isn’t going to happen overnight. It takes time to set aside that amount of money and things may crop up in the process. If this happens, don’t get dejected. Your emergency fund is intended to help in these situations, so it just means it’s doing its job!
3. Save Early and Diligently
If you don’t have saving habits built into your budget already, don’t worry. It’s never too late to start. Having said that, the earlier you start saving money, the sooner you’ll likely be able to reach your financial goals. This can be especially true when it comes to reaching large-scale goals, like retiring by a certain age or having enough money to buy a house.
One of the keys to saving money is to make sure you incorporate consistent saving habits into your budget. This might mean that you put a specific portion of your monthly income towards a general savings account, or you may want to break things down even further and have consistent amounts of money going towards different savings goals. The more specific, the better.
If you’re having a hard time incorporating these savings into your budget, or if you’re finding the whole process of budgeting a challenge in general, take a look at this guide on the 50-30-20 budget rule. It provides a simple framework that takes all of your spending into account and divides it into separate categories, including your savings. Having a well-functioning budget is essential to your overall financial health, so make sure it’s something that you make a priority.
4. Spend Smartly
For those who don’t have endless amounts of money to spend (so nearly everyone), it’s important to be aware of the distinction between spending money on things you need versus the things you want. Generally speaking, your “needs” are the things that are essential to your survival. These will include things like shelter, food, transportation, essential clothing, and healthcare. “Wants” on the other hand, are things you would like, but could live without.
This might seem obvious, but the things that fall into the needs category should be what you prioritize in your budget. Once these needs are accounted for, you can start to allocate some of the money that’s left over to other areas of your life. That doesn’t necessarily mean that you need to go out and blow all of the extra money you have on whatever catches your fancy. Going on a needless shopping spree can be an easy way to disrupt your financial stability. If you do find yourself with a little extra money, try to put it to good use by contributing to your retirement, your emergency fund, or some other savings goal you have.
5. Don’t Fall Victim to Lifestyle Inflation
Continuing on the subject of spending, it’s only natural that the more money you have at your disposal, the more money you’re likely to spend. So, if you get a promotion, a higher paying job, or a bump in your salary, you might be prone to start spending more. This is called “lifestyle inflation”.
While it may seem like there’s nothing wrong with spending more money if you start to earn more, this can start to hamper your long-term financial health. While you might be able to continue paying your bills while you start spending more in other areas of your life, doing this can hinder your ability to contribute to your long-term financial goals. After all, the more money you spend on discretionary expenses now, the less money you’ll have to spend on things that can contribute to your financial stability in the long run.
Work Hard to Maintain Your Financial Health
We know that there’s a lot that goes into maintaining a healthy financial standing. Between keeping track of your spending, maintaining a budget, and making sure you’re saving diligently, managing all of the different areas of your financial profile can seem daunting. But with a financial plan that’s geared towards your personal situation in place, making sure you maintain your financial health is possible!
Focus on building healthy financial habits, keep your eye on both your short- and long-term goals, and be willing to adapt to changing scenarios. After all, even the best laid plans can sometimes go astray, so be ready to roll with the punches and keep moving forward. We hope this article has given you some helpful tips to build off of and we wish you the best of luck as you work towards long-term financial stability!