Improving Your Financial Health
A Step-by-Step Guide
If you find yourself in a precarious financial situation, don’t worry – there are steps you can take to turn things around. By making some simple yet drastic changes to your spending habits, you can improve your finances and achieve financial stability. This ultimate step-by-step guide will show you exactly how to improve your financial health. With clear and actionable advice on assessing your current situation, setting financial goals, creating a budget, reducing debt, building savings, and investing wisely, you’ll be equipped with the tools you need to take control of your finances and make positive changes. So, let’s dive in and start your journey towards financial freedom.
Table of Contents
What Is Financial Health?
Financial health refers to the state of one’s personal financial situation, and it encompasses various aspects of financial well-being. In 2015, the term gained prominence when the Center for Financial Services Innovation (CFSI) published its first Consumer Financial Health Study. Since then, financial experts have provided different reports and guidelines on what it means to be financially healthy. Investopedia describes financial health as the state of one’s personal financial situation, while the Financial Health Institute defines it as the dynamic relationship between one’s financial and economic resources and their impact on physical, mental, and social well-being. Ultimately, financial health encompasses factors such as savings, retirement plans, expenses, and effective financial management. By improving your financial health, you can achieve greater stability and security in your financial future.
When it comes to financial health, savings and overall net worth are crucial components that provide resources for both current and future use. However, debt can have a significant impact on these resources. Debt can come in various forms such as mortgages, credit cards, student loans, and more. If left unchecked, debt can negatively affect your overall financial health by reducing your net worth and limiting your financial options. That’s why it’s important to actively manage your debt and develop a plan to pay it off in a timely and efficient manner. By doing so, you can reduce your debt load, increase your net worth, and improve your overall financial health.
How to Improve Your Financial Health
Just like physical health, financial health can be categorized as either good or bad. Your financial health is subject to change over time due to factors such as inflation, price fluctuations, and changes in your assets. Signs of good financial health include a steady income stream, timely payments, an increasing cash balance, and adherence to a well-planned budget. In contrast, bad financial health is characterized by monthly expenses exceeding income, leading to a lack of savings and an accumulation of credit card or personal debts. However, regardless of your current financial situation, there is always room for improvement. By taking key steps such as reducing expenses, paying off debts, increasing your savings, and creating a financial plan, you can significantly improve your financial health and achieve greater stability and security in your financial future.
1.Calculate Your Net Worth
Understanding your net worth is an essential first step in determining your overall financial health and achieving your financial goals. Calculating your net worth is a simple process that involves subtracting the value of your liabilities (what you owe) from the value of your assets (what you own). You can do this by listing all of your assets, such as cash, investments, and property, and then listing all of your liabilities, including credit card debt, mortgage, and student loans. Subtract the total value of your liabilities from your assets to determine your net worth.
Your net worth is a key indicator of your financial health, and it can fluctuate over time. To stay on top of your financial situation, it’s a good idea to review your net worth at least once a year. By doing so, you can track your progress towards your financial goals, identify areas where you need to make changes, and make adjustments to your financial plan as needed.
Build a Positive Net Worth
Tracking your net worth regularly allows you to identify areas for improvement and work towards building a positive net worth over time. One way to achieve this is by aiming to increase your net worth by an average of 7% every year through efficient debt repayment and income investment. However, if you find it challenging to keep track of your finances manually, you can use financial advisory tools like Personal Capital to automate the process. By inputting your banking, investment, and loan account details, the tool can automatically update your net worth to reflect changes in your account balances, saving you the hassle of doing the calculations yourself.
Aside from tracking your net worth, eliminating fees, and planning for retirement, Personal Capital provides you with expert advice and financial planning services whenever you need it.
2.Get Out of Debt
If your financial situation is dire and you’re already in debt, your top priority should be to get out of it as soon as possible. This is especially important because carrying debt can harm your chances of achieving financial independence.
Calculate Debt-to-Income Ratio
Calculating your debt-to-income ratio is a great way to put your debt into perspective. Divide all of your monthly debt payments by your gross monthly income to get your debt-to-income ratio.
Calculating your debt-to-income ratio is important to understand your ability to manage your debt payments. For example, assuming your monthly gross income is $7,000, and you pay $1,500 a month for your mortgage, $200 on auto, $150 on credit card, and $250 for the rest of your debts, your total debt payment amounts to $2,100 per month. Divide this figure by your gross income of $7,000, and your debt-to-income ratio is 30% ($2,100 / $7,000 = 0.30). Studies from mortgage banks have shown that borrowers with a higher debt-to-income ratio have a higher likelihood of having difficulties meeting their monthly payments. Your debt-to-income ratio is one of the factors that lenders use to evaluate your ability to repay the money you’ve borrowed.
If you’re looking to improve your debt-to-income ratio, you can either increase your income or reduce your debts. Consider negotiating with your creditors to lower interest rates or exploring debt consolidation options. You can also look for ways to increase your income, such as taking on a side hustle or asking for a raise at your current job.
Ways to Decrease Your Expenses and Save Money
Tracking your expenses through budgeting software can help you pinpoint where you’re spending the most money. Many unnecessary expenses may not seem significant at first glance, but they can add up and have a considerable impact on your finances over time.
Once you’ve identified areas where you can cut back on expenses, there are several easy ways to get started. Some of the most common expenses include food, transportation, shopping (for groceries and clothing), housing, phone bills, and internet bills. Here are a few strategies you can use to decrease your monthly expenses and save money over the long term.
Save Money on Food
Most of the time, the amount of money set aside for food expenses is insufficient to cover your monthly expenses, and you’ll have to dip into another budgetary category. The unfortunate fact is that this budgetary component is not clothing, transportation, or retirement savings, but rather credit cards. Credit cards are also not an option if you want to live a financially healthy life.
Here are some ideas for reducing food waste and saving money on groceries:
(a) Cut out dining out
Did you know that dining out can add up quickly, even if it seems like small expenses at the time?
On average, American households spend $4,049 on groceries for meals at home and $3,154 on dining out each year, totaling $7,203 annually, or $600 per month.
This means that the average American spends $7.64 per day on food. If you eat at a restaurant, you’ll likely pay more than that.
If you’re trying to save money and get out of debt faster, avoid eating out. Instead, find inexpensive ways to make eating at home enjoyable, like cooking simple meals with ingredients you already have.
(b) Cook and pack your own meals
When you cook at home, make sure you prepare meals from scratch rather than relying on premade dinners.
Also, try making extra portions of your meals so that you have leftovers to bring to work. This will help you avoid feeling hungry at work and getting tempted to eat out during lunch breaks.
(c) Try container gardening
Gardening can be a fun hobby that saves you money if done correctly. However, not all fruits, vegetables, and herbs are easy to grow, and some may even be too expensive to manage (which defeats the purpose).
If you’re new to gardening, focus on growing fruits and vegetables that produce a high yield with minimal care. These include basil, lettuce, tomatoes (which can cost up to $4 per pound in stores), green beans, and cucumbers.
(d) Buy nonperishable items in bulk
Many people overlook larger packages of nonperishable items, assuming that they don’t need the excess. However, you can save more money by comparing the cost per unit of different sizes before making your purchase.
Also, look for coupons and coupon codes for items you usually buy. If the coupon is worth your money, consider buying the item in bulk.
You can extend this habit to other nonperishable items that you use on a daily basis.
(e) Purchase store brands
You can save money on many food items by purchasing store-brand or generic versions instead of name-brand products.
(g) Use coupons and promo codes
Coupons and promo codes are a great way to save money on your groceries. You can find them in newspapers, magazines, and online. You can also sign up for email newsletters from your favorite stores to receive coupons and promotional codes.
Here are some tips for using coupons and promo codes:
- Organize your coupons – Keep them in a place where you can easily find them. You can use a coupon organizer, a folder, or an envelope.
- Know the store’s coupon policy – Every store has its own coupon policy. Some stores allow you to stack coupons while others do not. Make sure you read the policy before you shop.
- Check expiration dates – Coupons have an expiration date, so make sure you use them before they expire.
- Look for online promo codes – Many stores offer promo codes that you can use online to save money. You can find them on the store’s website or on coupon websites.
- Use loyalty cards – Many stores offer loyalty cards that you can use to save money on your groceries. These cards offer discounts and rewards that you can use on your next purchase.
By using coupons and promo codes, you can save a lot of money on your groceries. It takes a little bit of effort to organize and find them, but the savings are worth it.
Save Money on Transportation
Cars are expensive to own and maintain, with their value decreasing every year and ongoing costs such as fuel and repairs. According to AAA, the average cost of owning a car with an annual mileage of 15,000 miles in 2017 was $8,469, which only includes the cost of interest on a car loan.
Financial experts recommend that your car expenses should not exceed more than 20% of your monthly salary. To reduce your transportation costs, you can:
a) Use public transportation, which can save you over $10,000 per year on transportation costs if you live in an area with access to it.
b) Sell your car if you hardly use it, and use the proceeds for something more useful.
c) Carpool to work and share expenses with your passengers.
d) Keep your tires properly inflated, as this can save you money on gas and tire replacement.
Other ways to save on transportation costs include avoiding unnecessary driving, walking or biking when possible, and reviewing your insurance rates to ensure you have the lowest available rate.
Save Money on Insurance
Spending money on insurance can be beneficial when an unexpected situation arises, as it helps you manage cash flow uncertainty and stay protected. However, overpaying for insurance can be detrimental to your savings and other needs. Here are some ways to reduce your spending on insurance premiums:
a) Shop around
Compare at least three quotes when shopping for new insurance for your vehicle or house, and consider the services offered and pricing.
b) Use a single insurer
Get a discount from insurance companies by combining your homeowners and auto policies or getting an umbrella policy. Insurers will be more willing to offer discounts for bundling policies together to avoid maintaining separate records for your policies.
c) Raise your deductible
Increase your deductible to lower the amount an insurer is liable for and potentially reduce insurance premiums. A higher deductible is a smart move if your claims are infrequent. For most types of insurance, you can increase your deductible up to $1,000.
d) Take advantage of discounts
Auto insurance companies offer discounts for low-risk lifestyle drivers. Ask your carrier about discounts for factors such as being accident-free for three years, having anti-theft devices, driving a new vehicle, being a member of an affinity group, completing defensive driving courses, and having low annual mileage.
e) Pay for insurance less often
Insurers usually charge extra fees for monthly transactions. Save money by paying your premium every three, six, or twelve months.
Other ways to cut back on insurance expenses include maintaining a good credit record, reducing coverage on older cars, comparing insurance costs before buying a car, and driving safely to avoid accidents and traffic tickets.
Save Money on Entertainment
Here are some money-saving tips to reduce your entertainment expenses:
a) Reduce or eliminate your cable bill
Cutting down on your cable and watching less television is an effective way to decrease your entertainment expenses. Consider finding a cheaper way to access your favorite shows or just quitting your cable company altogether. You can take advantage of lots of streaming options such as Netflix, Hulu, and Amazon Prime. Subscribing to several streaming services can cost you less than $50, and you’d still have access to entertaining content.
b) Look for less expensive entertainment options
Take advantage of the facilities in your local library and community events like music festivals and art fairs, volunteer groups and organizations. If your community offers these and many other entertaining and recreational events, you can get all the entertainment you want without having to burden your finances.
c) Cancel newspaper and magazine subscriptions
Cancel all newspaper and magazine subscriptions for items in your mail that you don’t read when next it comes up for renewal. As long as it’s not important, and you don’t read it, it’s a waste of space and money. If you need some reading material, hit up your local library to get magazines at affordable prices. Apps like Trim or Cushion can help you negotiate or even get rid of unwanted subscriptions, including cable or news publications, to further lower your monthly expenses.
d) Cancel club memberships
Review your additional expenses on your local country club or your gym membership. You could get by just fine with the good old home exercise routine till you at least get out of debt. You could also use apps that pay you to get fit. If you’re using your country club membership less than once a month, then it’s time to say goodbye. This money is better off saved or spent on more pressing needs.
e) Reduce/cancel regular paid services
Look at some of the services you pay for every month and determine if the money you’re spending on them is worth it. If it isn’t, you should either cancel the service or find other inexpensive alternatives that can handle the task for you.
By implementing these tips, you can save money and live a financially healthy life.
Save Money on Utility and Energy Bills
a) Upgrade your appliances
Old appliances can be a significant drain on your energy bills, so consider upgrading to more energy-efficient models. Look for appliances with the ENERGY STAR label, which indicates that they meet energy efficiency guidelines set by the U.S. Environmental Protection Agency.
b) Use natural light and reduce the use of artificial lighting
Maximize the use of natural light during the day by opening curtains and blinds. Also, consider replacing traditional windows with energy-efficient ones that can help reduce energy loss.
Additionally, you can reduce the use of artificial lighting by turning off lights when not in use and using motion sensor lights in areas that don’t need to be lit all the time.
c) Seal and insulate your home
Leaky doors and windows can cause your heating and cooling systems to work harder, leading to increased energy bills. You can seal gaps and cracks with weather stripping or caulking, and insulate your home to keep it at a comfortable temperature all year round.
d) Use your thermostat efficiently
By using your thermostat efficiently, you can significantly reduce your energy bills. Set your thermostat a few degrees lower in winter and a few degrees higher in summer to save on heating and cooling costs. You can also invest in a programmable thermostat, which allows you to set different temperatures for different times of the day.
e) Reduce water usage
Water is another utility expense that can add up quickly. You can reduce your water usage by taking shorter showers, fixing leaks, installing low-flow showerheads and faucets, and only running full loads of laundry and dishes.
Ways to Increase Your Income and Make More Money
There are various ways to increase your income and earn some extra money to cover your necessary expenses. One way is to consider getting a part-time job, freelancing, or taking up gig work. You can also explore your hobbies and interests and turn them into a source of income, such as selling crafts, offering photography or writing services, or teaching a skill. Another option is to participate in paid surveys, sign up for focus group studies, or become a mystery shopper. Finally, you can consider renting out a spare room on platforms like Airbnb or renting out your car on services like Turo. By exploring these income-generating opportunities, you can supplement your income and improve your financial situation.
Another way to increase your income is by taking on freelance work or starting a small business. Some popular options include:
- Freelance writing, graphic design, or web development
- Consulting in your area of expertise
- Tutoring or teaching
- Pet-sitting or dog-walking
- Delivery services (e.g., UberEats, DoorDash)
- Selling handmade goods or crafts on Etsy or at local markets
Lastly, if you have a skill or talent that others might be interested in, consider offering lessons or coaching services. For example, you could offer music lessons, language tutoring, or personal fitness coaching.
By implementing some of these strategies to increase your income, you can make your financial situation more secure and achieve your financial goals faster.
3.Develop a Personal Budget
Budgeting is a crucial aspect of personal finance that can help you stay on top of your finances and achieve your financial goals. However, despite its numerous benefits, only a small percentage of people prepare a monthly budget. A personal budget is a spending plan that allocates your income for expenses, savings, and debt repayment for a defined period, usually a month. When setting up a budget, it’s important to consider your spending habits and previous loan history. One popular budgeting method is the 50/20/30 budget, where 50% of your income goes to essential needs such as mortgage, utilities, and insurance, 20% goes to personal financial goals such as savings and debt repayment, and the remaining 30% goes to wants such as entertainment and shopping. By following a budget, you can take control of your finances and achieve your financial goals.
Spend More Efficiently
Budgeting is not about restricting your spending, but rather about spending money more efficiently by prioritizing your needs. A budget helps you balance your expenses with your income and prevents you from falling into debt. By creating a realistic budget, you can set long-term financial goals such as starting a business, buying a home, or saving for retirement.
Budgeting enables you to identify and address any negative spending habits and focus on achieving your financial objectives. In the end, having a budget that works for you and sticking to it is crucial if you want to live a financially healthy life.
4.Build and Maintain an Emergency Fund
An emergency fund is a dedicated account set up for the purpose of having funds available for unexpected expenses or emergencies, such as job loss, accidents, home or car repairs, and medical bills. According to recent research, a majority of Americans would struggle to come up with $1,000 in case of an emergency. Having an emergency fund can help you avoid relying on high-interest debt options like credit cards or unsecured loans. Financial experts suggest that an emergency fund should have enough money to cover at least three months’ worth of living expenses, and it should be easily accessible and kept in a liquid form such as a checking or savings account. With an emergency fund, you can be better prepared for unexpected expenses that could otherwise negatively impact your financial health.
5.Invest Your Money
Following a review of your financial situation, your next step should be to strive for a financially healthy life.
What to Invest In ?
Investing can be a great way to grow your wealth over time, but it’s important to remember that investing always comes with some degree of risk. Before investing, it’s important to do your research and understand the risks involved.
Some common types of investments include:
Stocks: When you buy a stock, you’re buying a share in a company. Stocks can offer high potential returns, but also come with high risks.
Bonds: When you buy a bond, you’re essentially lending money to a company or government. Bonds tend to be less risky than stocks, but also offer lower returns.
Mutual funds: Mutual funds pool money from multiple investors to invest in a diverse range of stocks, bonds, and other assets. This can help spread out risk.
Real estate: Real estate investments can include buying property to rent out or flipping houses. Real estate can offer high returns, but also requires a lot of upfront capital and can be risky.
It’s important to remember that no investment is a sure thing, and it’s always a good idea to diversify your portfolio to spread out your risk. A financial advisor can also help you make informed investment decisions based on your individual financial situation and goals.
Make Sure You Diversify
Diversifying your investment portfolio can also provide you with the opportunity to earn passive income. For instance, you can invest in dividend-paying stocks, which can provide a steady stream of income, or real estate properties that generate rental income.
It is important to note that investing comes with inherent risks, and you should only invest money that you can afford to lose. It is advisable to seek the advice of a financial professional before making any investment decisions.
achieving financial health is crucial for everyone who wants to lead a stress-free life. It involves being in control of your personal finances, having a realistic budget, and setting up an emergency fund to cater for unexpected expenses.
Investing your money wisely is also an essential aspect of financial health. While there are several low-risk investment options, it is important to diversify your portfolio to minimize risk and maximize returns.
Ultimately, making informed financial decisions, avoiding high-interest debts, and consistently working towards your financial goals will help you achieve financial stability and security.