Personal Growth

Why Your Financial Health Matters

Are financial problems a constant niggling worry in the back of your mind? Like no matter how much you earn, there’s always that concern that you may not be able to cover your monthly bills or settle your debts?

If yes, then perhaps it is time for you to re-evaluate the state of your financial health. 

What is financial health?

Financial health is the state of your personal monetary affairs.

How much do you have saved up? How much are you putting away for retirement? How much of your income are you spending on fixed or non-discretionary expenses? All these things play a crucial role in your financial health.

How do you measure your financial health?

  • Here are a few questions you can ask yourself to better assess your financial health:

  • How prepared are you in the face of an emergency? Do you have a fund set aside as a contingency in case the unexpected happens, things like accidents, illnesses or theft?

  • Are you actively saving for retirement?

  • What are the assets that you own? Do you have any outstanding debt? Determine if your net worth is negative or positive by deducting what you owe from what you own.

  • Do you have a long-term goal for your finances in mind?

  • When it comes to debt, do you have any that is considered high interest? What percent of your debt does it constitute?

  • Are you covered by insurance?

Typical indicators of strong financial health include a reliable source of income, a good rate of return on any investments made, a consistently growing cash balance, and infrequent changes in expenses.

Why does your financial health matter?

Assessing your financial health is important as it is the first step to managing your finances better. Making your financial health a priority means taking stock of how you’ve been spending or saving your money and making improvements wherever you can.

Just like your physical health, maintaining good financial health requires consistency and upkeep. This is because the value and liquidity of your assets are constantly changing in accordance with the fluctuation of the price of goods and services.  

For instance, your salary may remain constant while the costs for food, petrol and rent increase. Despite the initial stable state of your financial health, if you do not manage your expenses in line with the rise in cost of goods, you may find yourself struggling to make ends meet.

How Do You Improve Your Financial Health?

Create a budget

Before creating a budget, you must be aware of how you’ve been spending your money. The easiest way to do that is to take note of every expenditure you make for an entire month. Once the month is up, take a proper look at how you’ve been handling your expenses. Are there things that you can cut back on? Are the things that you’ve been spending your money on necessities? Determine your “needs” versus your “wants”, and allocate the appropriate amount of funds to fulfil what you deem important.

If you’re just starting to budget, following models such as the 50/30/20 budget rule or the 70/20/10 budget rule can be a good starting point. The 50/30/20 rule is a budgeting strategy where you spend 50% of your income on essential needs, 30% on wants, and 20% on needs, while the 70/20/10 sees that you spend 70% of your income on essential needs, 20% on wants and 10% on needs. 

Once you grow more accustomed to taking better care of your finances, you can decide for yourself how you would like to allocate your budget in accordance with your means and lifestyle, and set different rules for yourself.

Set up an emergency fund

Experts recommend putting aside as much as six months’ worth of expenses for a rainy day.

A month of expenses equates to how much you spend in a single month on things you can’t go without, such as. food, rent, and utilities. It does not include discretionary expenses such as meals out or luxury items. After calculating how much is a month’s worth of expenses, multiply that number by six. There’s your target amount for your emergency fund.

That said, your personal financial circumstances may warrant a smaller or larger emergency fund. While setting aside more for a rainy day is recommended, certain factors such as job stability, the number of people who are financially dependent on you, and your monthly income play a factor in how much you should set aside. Ultimately, it is up to you to make that decision.

And if the total amount looks daunting at first, do not worry. What’s important is consistently putting aside money in your emergency fund, even if it’s only a little each month.

Settle any outstanding debts you owe

Delaying debt repayment will cause your financial health to suffer in the long run. Not only that, but having debt has been proven to negatively affect both mental and physical health, as well as create increasing strain in households.

While there are several strategies for debt repayments, the best course you take will depend on your circumstances. A financial planner is the best person who can offer a professional assessment of the course you should take. 

Financial planners can help you map out a plan to manage your personal expenses better, as well as deal with any outstanding debt you may have accumulated.

Saving for the sake of saving

At the end of the day, what matters most is your reason for wanting to be financially healthy. While the idea of having more money and more leeway to spend it however we want is certainly appealing, saving up money just for the sake of accumulating it can only motivate you so far.

Is it to pay off your student loans? To settle the mortgage on your house? To provide for your children or family?

Having a goal in mind helps you to be consistent with your savings.

For more information on financial planning, budget setting, and debt management, reach out to a Naluri coach today.

Written by:
Asma' Jailani