Money is a subject that never leaves our thoughts, particularly at a time when a global recession seems ever more likely thanks to the coronavirus and its impact on the world economy. After a decade of boom we could be set for a bust, which means practicing good financial health is vital if we want to survive what could be a lean few months and years.
If your financial health isn’t as good as it could be, or, worse, you have no idea what shape your finances are in, our 10 step guide to boosting your financial health will help you assess what needs changing and suggest ways you can not only regain control of your finances but set you up for a healthy financial future.
Having a budget is the key to managing your money. Or, to put it another way, you cannot possibly hope to control your finances if you don’t do it. Many people think of budgeting as an exercise in joy-killing, but the truth is that it allows you to enjoy a more stress-free life while still enjoying the things you already do (just perhaps not all of them or quite as often).
The simplest form of budgeting comes in the form of comparing your income with your outgoings and working out where your money goes, ideally on a budget planner or simple spreadsheet. This will allow you to separate your essentials from your non-essentials and work out why you’re barely making ends meet, or worse, always in debt.
Analyzing your monthly expenditure on a budget planner can be an eye-opening process and often leads to instant changes in your mindset as well as your day to day living. Once you’ve worked out where your money is going, you can enact the next nine steps.
2. Plan for Future
Planning for the future can seem boring, but we’re not just talking about your retirement – we’re talking about anything from the next year to the next fifty years of your life. You don’t want to be working for 10 years and wake up to find you have nothing in the bank to show for it.
In an ideal world you would start a pension fund of some kind, be it private pension fund, company pension fund, 401(k) or any other, when you’re in your early twenties and pay in regularly. However, this isn’t possible for many people, which is one of the reasons why a pension crisis is looming in the US and many other countries.
As part of your budgeting, setting any amount aside for future planning is a great idea – just something for emergencies, or any plans you may have for the future (foreseen or unforeseen!).
A crucial part of the savings process is automating it. If you leave it to yourself to manually stick some cash in a savings pot every month, there will be months where you come up with excuses not to do it and spend it instead.
Instead of relying on yourself, set up a direct debit so the same amount is taken out every month without you thinking about it. Where possible, do this for all bills and other essential expenditure too so you can make sure you keep the lights on. Automating the bill-paying process takes the stress out of physically seeing the cash or check being handed over, making it almost invisible, leaving you to deal with what’s left.
4. Pay Your Debts
Debts, especially those with interest rates applied, are going to be nothing but a drain on your resources. It is critical if you have debts of this kind that you pay them off as quickly as you comfortably can. Of course with something like a mortgage or a large loan this has to be managed on a much longer term basis, so you have to factor in interest payments as a necessary evil.
Credit card debt however is something that eats away at your finances, and so should be cleared as soon as possible, especially seeing as you can’t get penalized for early repayment. If you can’t afford the monthly payments, consider transferring the balance to a new card with an interest free period and buying yourself a little time – the same regular payment is going to be paying off the principal debt, which will clear it faster.
Once each credit card debt is clear, cut up or cancel your cards until you have one left for emergencies – if you can trust yourself!
5. Need, not Want
One of the key reasons we get into debt or mismanage our finances is through consumerism. We can’t blame ourselves entirely for this – we are born into a world where we are bombarded with messages to spend, spend, spend on stuff that ends up being donated, discarded, or cluttering up the basement years down the line.
The key to controlling spending is really focusing on ‘need’ versus ‘want’. When considering a purchase, think about how your life will be impacted if you don’t buy it. Using the example of a broken washing machine, if you don’t buy a replacement your life will be negatively impacted in terms of time and convenience, making it something you need. ‘Needs’ are what you would use your savings for, as we highlighted in point 2.
If you happen to have walked past a pair of shoes in a shop window however and think ‘I need them’, consider what would happen if you didn’t buy them. Would your life be negatively impacted in any way? Probably not. So they qualify as a ‘want’, which means they must be balanced against all the other non-essential items you might want to buy with what is left over of your monthly budget once your bills and essentials are paid.
Putting potential purchases into ‘want’ and ‘need’ categories quickly puts a different spin on how you see money and will soon see you spending less unnecessarily.
6. Have Some Fun Money!
Money is meant to be enjoyed, otherwise what’s the point of working all week for it? The sad fact about life however is we will always pay more to others than we will to ourselves for the vast majority of our working lives, which puts extra pressure on what we do have left.
To keep your sanity and to make the earning process worthwhile, it is vital to have some money left over to enjoy, but if your new budget leaves you with much less than you expected, you may have to ration your fun money. Try downgrading your experiences a little or doing them less frequently…or try something completely different that will be cheaper to do.
Set yourself a monthly or weekly limit that you simply DO NOT GO OVER. Staying within this limit means you can enjoy yourself guilt free, safe in the knowledge that your essentials are taken care of.
7. Benefit From Benefits
Are you making the most of your entitlements, both from your employer and the government? Alongside medical insurance, are there other perks you’re missing out on at work, such as fitness schemes, performance bonuses, college debt relief, in-house training, or fast-track promotion programs?
Similarly, do you have family or personal circumstances that fit in with government programs such as disability and workers compensation, minimum wage, or unemployment benefits? The chances are you’ve paid taxes towards these programs, so make sure you take your chance to benefit from them too.
This may seem like a distant dream to some, but there’s no reason why you can’t skip that takeout or night out and invest the cash instead. Data shows that, over time, the stock market usually goes up, potentially giving you an extra financial boost.
There are several sites that offer novice investors the chance to trade shares commission-free, while cryptocurrencies like Bitcoin are increasingly becoming a favored option for younger generations. Any investment must be preceded by research, but picking the right ones can give you a very welcome return in time.
9. Change Your Financial Mindset
Changing your financial mindset is not easy, especially if you’ve never had to consider it before. There are a range of approaches you can take on changing your financial mindset, and libraries full of material on how to do so.
Use trends as examples, but try not to just jump headfirst into the theories of whichever guru is all over Instagram this week. Cast your net wide and see what appeals to you. Famous works on this subject include Rich Dad, Poor Dad by Robert Kiyosaki, Your Money of Your Life by Joe Dominguez and Vicki Robin, and The Total Money Makeover Workbook by Dave Ramsey.
As well as these classics, don’t discount modern movements such as minimalism, which teach you that owning and spending less often leads to a happier, less stressful life.
10. Act now, and keep consistent
Don’t wait to see if things improve – without your action, they won’t. Calculating your financial health status is the key first step, and can be quickly deduced by half an hour with your bank statements and a spreadsheet. Carrying on blindly will only lead to more problems down the road.
Once you have put a plan of action in place, it is essential that you keep it going. Find a point in the day or the week (try not to leave it longer than a week) where you can go through your account and tally up your income and outgoings to make sure you’re on the right track. There are several budgeting apps out there that can help you do this, even some that link to your bank account and alert you when you’re stepping over your self-imposed lines.
If you can carve your financial overviews into your weekly or daily routine it will soon become second nature, and you will quickly see your financial health improve as your plans bear fruit.
Tough, but Rewarding
Changing the way you use your money can be a tough but ultimately rewarding process, and it can sometimes help you lead a healthier lifestyle overall. Knowing exactly where your money is going can massively reduce your stress levels, especially when most of the outgoing are automated and taken out of your hands.
It can also give you a new appreciation for the value of money and help you make better purchasing decisions, so you don’t end up wasting it and regretting it afterward. And if you can end up with some savings or, better yet, investments at the end of it, that represents a win in anyone’s book.