Financial health refers to a person’s state of monetary affairs. Many factors can affect your financial health, from how much you earn in a month, how much you spend daily, to how much you save every cut-off. Simply put, every financial decision you make directly affects your financial health.
To ensure a secure future, you need to improve your financial health now. There are many ways to achieve better financial health, but in this article, we will be focusing on three key areas that most people tend to forget. These basic finance rules will guide you to make better-informed financial decisions to help you move closer to your life goals.
1. Know exactly how much you are worth (financially speaking, of course.)
To start being financially literate, you have to be aware of everything around you that is connected to money. For many people, this level of awareness begins once he (or she) starts working. Once you receive your salary, you have a starting estimate of how much you are worth when it comes to your job. However, your total financial worth is not always the same as your monthly salary.
To calculate your net worth, you need to make a list of your assets, which refer to financially valuable items you own, such as property, perhaps an expensive toy collection, or a collector’s edition trading card. An asset should have the capability to generate money for you at any time, and ideally, its value increases over time.
Once you have listed down your assets, you also need to figure out your liabilities. Liabilities are made up of debts, loans, and anything you have payable to anyone. Subtract your total liabilities from your assets, and you will arrive at your net worth.
Keep in mind that your net worth can fluctuate over time because it’s a monetary expression that relies on how the economy prices different products. By tracking your net worth through the years, you can see your financial progress and highlight your areas of strength and weakness. You can then use this information to identify areas of improvement and places you should focus on for continued success.
2. Learn how to budget as necessary.
Learning how to budget your money is almost mandatory as you become an adult. What you earn might now always be enough to buy everything you need, and then, of course, you also want to buy things you want but don’t need. A healthy financial situation finds a balance between the two, allowing you to prioritize purchases you need while allotting a small allowance for luxury items.
In creating a budget, you first need to project how much money comes in for a certain period. Most people rely on a monthly salary to make a monthly budget to fit the cash flow better. Next, you need to list down an allotment for all expenses that you need to pay for. If you are lucky enough, there will still be money left after the deductions. You can set this aside as your savings or invest it in a business to potentially increase your monthly income.
Monitor your net worth and your monthly budget regularly to keep an idea of where you currently are financially.
3. Watch out for lifestyle inflation.
Lifestyle inflation is a real threat to financial health, and a lot of people fail to recognize the symptoms until they have lost too much money. This economic condition occurs when people start to advance on their businesses or careers and earn more money. However, instead of growing their savings and investments now that they have a higher cash inflow, they only increase their expenses.
Some people will defend lifestyle inflation, saying as long as they can pay all the necessary expenses, they should be allowed to spend more and upgrade their way of life. The only ones they are hurting by succumbing to this phenomenon are themselves. Lifestyle inflation does a lot of damage in the long run because it considerably limits your chances to build more wealth. It might not make sense if you look at the amount spent on a per-item basis, but if you compute the total expenses in multiple years, it starts to look much more significant.
An excellent way to combat lifestyle inflation is to redirect your excess money into investments. Investments can be similar to a crisis intervention platform in this context; they quickly defuse the chances of the behavior from causing more damage. A good investment can also serve as a healthy distraction by keeping your attention on it so that you won’t think about needing to match up with other people’s spending habits, which is another common reason people fall prey to lifestyle inflation.
Keeping yourself in good financial health is already winning half of the battle. By building healthy habits financially, you are setting yourself up for smarter business decisions and better chances at a successful retirement.