Know About Your Financial Health
When someone asks you about your health, the first thought that comes into your mind is to tell them about your physical health. With awareness, people have also started sharing and talking about their mental health.
But do you know that when it comes to health, your finances play a crucial part?
Yes, today we are talking about Financial Health!
So what is “Financial Health”?
The state of one’s financial affairs is referred to as “financial health.” The amount of money you have in savings, how much you’re saving for retirement, and how much of your salary you spend on fixed or non-discretionary expenses are all factors in your financial health.
Factors that determine your financial health:
-Savings and overall net worth are added together to determine the amount of money available for immediate or future use.
-Savings and overall net worth are added together to determine the amount of money available for immediate or future use.
-Credit cards, mortgages, and student loans all have an impact on the money available for future use.
-Financial health isn’t constant, and it varies depending on a person’s liquidity and assets.
-The price of goods and services fluctuates, which has an impact on one’s financial health.
-A constant stream of income, little change in spending, predictable returns on assets, and a growing cash balance are all signs of good financial health.
Some tips to have a financially healthy 2022:
– Know your Net Worth
Net Worth is the value of assets of a person, barring the liabilities they owe.
Net Worth is not just for all the business tycoons and hotshots. You should be aware of your net worth and take measures to improve it year on year.
Net worth can be positive or negative, with the former indicating that assets outnumber liabilities and the latter indicating that liabilities outnumber assets. Good financial health is indicated by a rising net worth. Declining net worth, on the other hand, is cause for concern because it could indicate a drop in assets compared to liabilities.
The most effective strategy to enhance net worth is to either reduce liabilities while assets remain constant or rise or to increase assets while liabilities remain constant or fall.
– Harness the power of compounding
The ability of an asset to generate returns that are then reinvested or remain invested to create its earnings is referred to as compounding. Compounding, in other terms, is the process of generating earnings from prior earnings.
Compounding (sometimes known as “compound interest”) has the potential to turn your working capital into an income-generating asset. Compounding is the process of creating profits from an asset’s previously reinvested profits. It takes three things for it to work: the original investment to stay invested, the earnings to be reinvested, and time. You may be able to accelerate the income potential of your original investment if you give your assets additional time.
– Spend according to your needs and wants
An old Hindi adage goes something like, “Stretch your legs according to the length of your blanket”
This saying will hold when it comes to your finances. You should have a clear understanding of your needs and wants and budget accordingly.
Needs are the basic expenses that you cannot forego. These are the things/utilities necessary for your survival. These include:
-Food
-Rent
-Healthcare
-Medication
-Commute
-Bills
-Basic Clothing
Wants are the things and experiences which are not necessary for your survival and can be foregone, i.e. they are expendable. These include:
-Travel
-Dining
-Electronic gadgets
-Fancy Clothing
-Subscription-based services such as Netflix
-Travel/Vacation
Wants aren’t always negative. They’re enjoyable, and they may often assist you in achieving key goals such as remaining in touch with loved ones, having fun, or being healthy. They are, however, not required for your survival or well-being.
– Build an emergency fund
It’s critical to “pay yourself first” to guarantee that money is set aside for unforeseen expenses like medical bills, a major auto repair, day-to-day expenses if you lose your job, and so on. The optimal safety net is three to six months’ worth of living expenditures.
Most financial experts advocate putting aside 20% of each paycheck each month. Don’t stop saving once you’ve built up your emergency money. Continue to set aside 20% of your income each month for other financial goals, such as a retirement fund or a down payment on a home.
– Keep up with “Inflation”
Inflation is the gradual loss of a currency’s buying value over time. The increase in the average price level of a basket of selected goods and services in an economy over time can be used to calculate a quantitative estimate of the rate at which buying power declines.
A rise in the general level of prices, which is frequently stated as a percentage, signifies that a unit of currency now buys less than it did previously.
Inflation has the greatest impact on the value of fixed-rate debt securities since it devalues both interest rate payments and principal repayments. After correcting for inflation, lenders lose money if the inflation rate exceeds the interest rate. This is why investors sometimes look at the real interest rate, which is calculated by subtracting the nominal interest rate from the inflation rate.
Longer-term fixed-rate debt is more susceptible to inflation than short-term fixed-rate debt because the effect of inflation on the value of future repayments is proportionally greater and compounds over time.
The investments that do best under inflation are those that are guaranteed to bring in more money or improve in value when inflation rises. A rental property subject to periodic rent increases is an example.
– Know your income and expenses through budgeting
What is the definition of budgeting?
It is, at its most basic level, a ledger that details the spending decisions you intend to make. It forecasts how much money will come in over the next few months and sets aside enough funds to cover expenses like food, housing, transportation, and insurance.
A smart budget also incorporates monthly savings allocations. In effect, a budget not only maps out a route to a specific financial goal but also serves as a lantern, illuminating the path and ensuring that you don’t get lost. You’re more likely to be in the dark about your financial health and lost in the wilderness of debt and financial instability if you don’t have one.
Bottom of the line
Being financially strong should be the aim, but the ultimate goal should be to become “Financially Healthy”. It’s critical to look at the broad picture and develop habits that will help you make better financial decisions and improve your financial health. It will be impossible to follow good financial practices without good general routines.