5 Tips for Financial Health
1- Do the Math- Net Worth and Personal Budgets:
A bit of number crunching can help you evaluate your current financial health and determine how to reach your short- and long-term financial goals. As a starting point, it is important to calculate your net worth. This is the difference between what you own and what you owe. To calculate your net worth, start by making a list of your assets (what you own) and your liabilities (what you owe). Your net worth represents where you are financially right now and can help you evaluate your current financial health status and set goals. A personal budget is a tool you can use to reach those goals. More about this important tool in Financial Health- Part II.
2- Recognize and Manage Lifestyle Inflation:
Most individuals will spend more money if they have more money to spend. As people advance in their careers and earn higher salaries, there tends to be a corresponding increase in spending, a phenomenon known as lifestyle inflation. Even though you might be able to pay your bills, lifestyle inflation can be damaging in the long run because it limits your ability to build wealth: Every extra dollar you spend now means less money later and during retirement. Recognize this behavior and manage by increasing your saving as you increase your spending. Always aim for at least 10% of your income to head straight to savings!
3- Recognize Needs vs. Wants- Spend Mindfully:
Unless you have an unlimited amount of money, it’s in your best interest to be mindful of the difference between needs and wants so you can make better spending choices. “Needs” are things you have to have in order to survive: food, shelter, healthcare, transportation, a reasonable amount of clothing (many people include savings as a need, whether that’s a set 10% of their income or whatever they can afford to set aside each month). Conversely, “wants” are things you would like to have, but that you don’t need for survival. For example, you might need a car and want a brand new BMW, but you probably don’t need it. Any difference in price between a more economical vehicle and the luxury SUV is money that you didn’t have to spend.
4- Start Saving Early:
It’s often said that it’s never too late to start saving for retirement. That may be true (technically), but the sooner you start, the better off you’ll likely be during your retirement years. This is because of the power of compounding. Compounding involves the reinvestment of earnings and it is most successful over time: The longer earnings are reinvested, the greater the value of the investment and the larger the earnings will (hypothetically) be. To illustrate the importance of starting early, assume you want to save $1,000,000 by the time you turn 60. If you start saving when you are 20 years old, you would have to contribute $655.30 a month – a total of $314,544 over 40 years – to be a millionaire by the time you hit 60. If you waited until you were 40, your monthly contribution would bump up to $2,432.89 – a total of $583,894 over 20 years!
5- Build and Maintain an Emergency Fund:
An emergency fund is just what the name implies: money that has been set aside for emergency purposes. The fund is intended to help you pay for things that wouldn’t normally be included in your personal budget: unexpected expenses such as car repairs or an emergency trip to the dentist. It can also help you pay your regular expenses if your income is interrupted; for example, if an illness or injury prevents you from working or if you lose your job. The traditional guideline is to save three to six months’ worth of living expenses in an emergency fund, but the more the better!