FIVE RULES TO IMPROVE YOUR FINANCIAL HEALTH
The term “financial health” refers to how you manage your money and how you plan for your future. All of your financial decisions and actions have an effect, direct or indirect, on your financial health.
Here, we discuss five broad money rules that can help get you on track to achieving your financial goals.
DO THE MATH – CALCULATE YOUR NET WORTH AND BUDGETS
Don’t ignore your finances by leaving them to chance, a bit of math can help you evaluate your current financial health and determine how to reach your financial goals.
As a starting point, you can begin with calculating your net worth. Make a list of your assets and your liabilities. Then subtract the liabilities from the assets to arrive at your net-worth. Your net worth represents where you stand financially at that moment.
Simultaneously, it is important to calculate your personal budget – a spending projection. Once you’ve made the appropriate spending projection, subtract your expenses from your income.
To really understand where you stand financially, and to figure out how to get where you want to be, math is important.
RECOGNIZE AND MANAGE LIFESTYLE INFLATION
Most individuals end up spending more money if they have more money to spend. As people advance in their careers, there tend to be a corresponding increase in spending, a phenomenon called as “lifestyle inflation”.
It’s common for people to feel the need to match their peers’ spending habits. If your friend drives a BMW, vacations at exclusive resorts, and dines at expensive restaurants, you might feel pressured to do the same.
RECOGNIZE NEEDS VS. WANTS – SPEND MINDFULLY
Unless you have an unlimited amount of money to spend on your use-to-lifestyle throughout, it’s in your best interest to be thoughtful with your money and recognize between your needs and your wants. This will help you to make better spending choices. While “Needs” are things you have to have in order to survive, it includes food, shelter, healthcare, and transportation, etc. These expenses are unavoidable. On the contrary, “Wants” are things you desire to have, you can survive without them.
It can be challenging but not impossible to live a moderate life, below your means. Prioritize your needs in your personal budget, that’s the key.
START INVESTING EARLY
It’s often said that it’s never too late to start investing for retirement. However, I would suggest the sooner you start, the better. This is because the sooner you start; you put the magic of compounding at work.
BUILD AND MAINTAIN AN EMERGENCY FUND
As the term implies, an emergency fund is money that has been kept aside for emergency purposes. Emergency fund is intended to help your pay for the unexpected expenses such as an emergency trip to the doctor or survival during loss at income.
Although as per money guideline it is suggestive to save three to six months’ worth of living expenses in your emergency fund. The unfortunate reality is hardly anyone follow this rule. Remember, establishing an emergency fund is an ongoing mission.