What is financial health and why do I care?
As defined in the Business Dictionary:
“A way in which to measure the overall financial aspect of an individual that includes the amount of assets they own and how much income they must pay out to cover regular and other expenses.”
Having healthy finances means you can afford comfortable life for you and your family throughout your life.
Let’s simplify this and say that good financial health is when your Net Worth (the sum of everything you have) is positive and forecasting your future finances has a positive trend (i.e. your Net Worth will grow). MoneyWiz has a built-in forecasting tool that allows you to quickly check all this.
In this article, we’d like to focus on the psychological aspect of achieving financial health.
So, how do I get there?
We’ve been serving hundreds of thousands of customers who use MoneyWiz to improve their financial health. Over the past 4 years, we’ve spoken to tens of thousands of them, and we’ve observed common traits between people with good financial health and people with bad financial health.
In this article, we’d like to focus on the very core of improving your financial health. And that is, believe it or not, your attitude towards it.
If you’ve read the article this far, congratulations, you’re on the right track! Read on!
Rule #1 – Reality Check
So, you think everything’s all right. Are you sure? Most people don’t realize that they’re on the way to a financial disaster, before it’s too late. So, it’s time to face the reality. If your debts are more than your savings, if you consistently get loans/credits or make purchases on installments plans, or if you earn less than you spend, you have a problem. And it’s a big one. Don’t worry, it’s fixable, as long as you realize you have a problem and take actions to fix it.
If none of the above is valid for you – job well done! Pat yourself on the back and continue doing what you’re already doing, because it’s obviously working.
Rule #2 – Calculate the Scope of Your Problem
The first step to improving your financial health is calculating the scope of your problem. Meaning – how much you owe vs how much you earn.
Here’s what you need to do:
- Make a list of all your savings and checking accounts with their balances. That’s your positive balance. Calculate the total positive balance that you have.
- Make a list of all your credit cards, loans, mortgages and their balances. That’s your negative balance. That’s the money you have to pay off over time.
- Make a list of all your monthly recurring bills, but skip your credit card, loan and mortgage payments. If you are paying off an iPhone for example, that’s a bill. Your electricity, gas, phone, internet, TV, health insurance, etc…all these are bills. Make a list of them, and see the total amount of money you have to pay each month, in bills. MoneyWiz gives you this amount immediately after setting up the bills (scheduled transactions as they are called in the app).
- Write down your monthly income (or an average if it varies) after taxes
Good, now you have it all down. Let’s do some really simple math. For the sake of the example, let’s assume these numbers:
Total Positive Balance: $10,000
Total Negative Balance: $30,000
Total Recurring Monthly Bills: $1500
Total Monthly Incomes (after taxes): $4000
Now, subtract your total monthly bills from your income. i.e. $4000 – $1500. It means you are left with $2500 to pay off your negative balance, buy food, clothes etc and put aside for retirement.
Now, you have a more realistic idea of the scope of your problem. You have $2500 per month to live with AND pay off your $30,000 negative balance.
MoneyWiz has built-in reports that will make all those calculations for you, all the time, so you can constantly monitor these financial metrics.
Rule #3 – Get Aware of Your Spending Habits
A lot of us don’t feel that we spend so much, but then again, the money math never adds up at the end of the month. This happens to all people who are not REALLY aware of their spending habits.
At this point, you really need a personal finance software such as MoneyWiz, or you will be wasting a lot of time doing a lot of math to come up with the numbers that show the reality about your spending habits. What MoneyWiz will do for you is to show you how much you spend on monthly basis, how much you’ve spent historically and it will give you a breakdown of your spendings by category. You will be surprised! I know I was, and I still am from time to time!
You need to get aware of your spending habits. Most of all, you need to know how much you spend for different things, on monthly basis. For example, how much you spend on average for groceries, for dining out, for entertainment, for personal care etc. Having these numbers is essential for the next step of improving your financial health.
Rule #4 – Make a Plan
MoneyWiz will help you see a clear picture of your financial life, at all times. Assuming you got this far it’s time to make a plan. While planning for financial health is very personal, we can share a few tricks that we’ve learned over time. These tricks are proven to help people improve their financial health:
- Reduce your debt
Why: As soon as you get out of debt, you can start saving for real. You can also avoid penalties, bad credit and interest. All of this will contribute positively to your financial health.
How: While there are lots of strategies, we’d like to offer the one that is applicable to almost anyone: If you have too many credit cards (more than 3) or small loans, start by paying off as many of them as you can as soon as possible. It’s better to use some of your savings and more of your credit from 1 credit card, to pay off the others, and then just focus on paying off this one credit card. This will simplify your financial life and help you stay focused. Once you pay off a credit card, consider closing it, until you get down to 2-3 credit cards in total.
- Reduce your spendings
Use MoneyWiz to see how much you spend on different things. Think of areas you can improve. For example if you spend too much on entertainment or personal care, you can consider spending less for these, until you improve your financial health.
- Make budgets
Make budgets in such a way where staying within the budgets limits means you will be spending less than you earn. This is the golden rule of savings and financial health – spend less than you earn! Budgets help you achieve that, by giving you a constant reminder of how much you’ve spent this month and how much is left.
Rule #5 – Change Your Attitude Towards Money
Your attitude towards money is one of the most important factors to financial health. If you have the wrong attitude, sooner or later you’ll get in trouble. So it’s time to change your attitude and consider some of these advices:
- Spend less than you earn. This is the golden rule for good financial health! If you can’t decrease your spendings, then you have to figure out a way to increase your income. Be it a second job, a better paid job, re-qualification etc, it’s up to you. But whatever you do, you have to spend less than you earn.
- Don’t get more and more loans and credit cards. While they’re not an expense for you right now, they add up quickly and you end up owing more than you can afford.
- Plan for the future – the right attitude is not just about getting out of debt. It’s about planning for your future financial health. Put money aside in savings and retirement! If you think it’s too early to think of this, then look at it this way – if you put money aside, you obligate yourself to be even more disciplined about your finances as you will have less money to spend on monthly basis. So, even if it’s a small amount, put something aside.