How is Your Financial Health?7 min read

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This article originally appeared on GetConnectDad.

In the spirit of being healthy, we will be looking over five rules that you can follow to improve the health of your finances. The rules are adopted from this article done by Investopia.

Do the Math — Net Worth and Personal Budgets

It seems we always hear from the financial experts that we need to create and live using a budget. They make is sound so constricting that we have to live with a pre-planned set of rules each and every month. Well, if this is your view of a budget, then I’ve got news for you. You are living on a budget already, except you are just living that budget out day by day, spending your money. There is a better way. You can create your budget in 3 easy steps:

1. Write down all of your income.
2. Write down all of your expenses.
3. Spend your money on paper before the month begins.

Currently, my wife and I have been budgeting each and every month since August 2011 and we’ve seen tremendous growth in our financial journey. In fact, we’ve actually grown our net worth by almost 500%. We actually track our net worth publicly over here month by month.  So, after creating your budget each month, you should start being able to track your net worth positively. If net worth is one of those crazy financial terms that you thought people were just using to get over on you, it’s just what you owe (debts) minus what you own (assets) equals your net worth. It doesn’t matter how much you make, if you can’t get your expenses under your income, then you will never be able to grow your net worth, which basically builds your wealth.

Recognize and Manage Lifestyle Inflation

What’s the first thing that you want to do when you get a raise at a job? Celebrate! Unfortunately, most people use a $5,000 a year pay raise to justify buying a $32,000 new car to celebrate or maybe a new wardrobe, or a fill in the blank here. It’s ok to move up in things, but do it within a percentage of your move up in pay. Looking at the big picture is always helpful. Asking how much vs how much per month is a good way to help keep lifestyle inflation down. When you start looking at things by how much they cost over longer periods of time, you will find that it will be easier to say no to things, or at least put things off. By saying no to something now, you are saying yes to something bigger in the future.

The more you can put off these purchases and make due with what you have, the more you will have left over to save and invest and get ready for retirement. So, the next time you get that raise at work, do some simple math to find out what it equates to annually and celebrate accordingly!

Take some time to go over your numbers and see how financially healthy you are. Click To Tweet

Recognize Needs Vs. Wants – and Spend Mindfully

I tend to be on the techie side of things. Having the newest iPhone, new computers, a big TV, I could go on and on. I actually have to be very mindful of what I subscribe myself to or where I go because I can torture myself quite a bit.

I actually remember taking my wife to Best Buy and pricing out a brand new iPad and trying to justify to her that I “needed” to spend $900 that we hadn’t even saved up to purchase this device (that would be outdated in less than a year) because it would change how I did life. This, of course, is not the truth and, thankful for her, she saw straight through me and loved me well by telling me “no, I just don’t see how we can spend this money at this time.”

She has supported me through and through on all of my dreams (as long as they are making sense and are within reason) but she was pretty set in her opinion on this one. And for good reason. We didn’t need it and it wasn’t going to do anything except make the nice laptop/tablet/phone that I had at home start collecting dust for a short period of time while I played with the new “shiny” that came to market.

Start Saving Early

This is one of my favorite rules because it has so much hope and promise in it. If you are on the other side of things, it can also mean that it has a bunch of regret and should haves built in as well. One of the best things that you can do is work to set aside a portion of your income each pay period to save and invest. By forming a habit of this, you will be automatically creating wealth. Even starting small can have big outcomes.

Did you know:

• Set aside $25 a month, and you will have $300 after a year.
• Set aside $100 a month, and you will have $1,200 in a year.

What could you do with an extra $300-$1,200 next year? By learning to save often and repeatedly, you will be able to pay for things up front and save the interest that you would be paying to finance purchase.

What could you do with an extra $300-$1,200 next year? Click To Tweet

If you were to apply this same principle by just upping your retirement contributions by 1-2% per year, you would be able to grow your wealth much faster as well as do it where you wouldn’t even miss the money. It’s when you try to take the bigger steps at once that it starts seeming more daunting. Think about it, if you started making a budget each month to get expenses under control, you could take the extra money you found and start investing it to grow that much faster and you wouldn’t even miss it because you were already spending it on things you didn’t need.

Build and Maintain an Emergency Fund

An emergency fund is a savings account that you have put together in case something unexpected happens.

• The starter goes out on the car
• the furnace dies in the middle of the winter on a weekend
• you total your car
• you have an emergency hospital visit that you have to pay for.

The list could go on and on about what could go wrong. Keeping three to six months of expenses in an emergency fund is usually enough to get through a big event. And most people will have a big, unexpected emergency come up in the next one to five years.

Don’t stress if you find that you have to use your emergency fund either. I remember we had our transmission go out on our car with 240,000 miles on it. The car was a beast but we had already rebuilt it 3 times. It was time to replace the car. We had saved up enough to go out and purchase another used vehicle with cash from our emergency fund. This saved us from spending another $1,800 to get the transmission rebuilt on a car worth about $1,000. It was a great feeling to know that we had the money in place to purchase another vehicle. We didn’t have to go into debt and hurt our cash flow each month. We were happy to rebuild our emergency fund after that because we know the peace that we got from it.

In Closing

Take some time to go over your numbers and see how financially healthy you are. Use this financial health calculator from CNN Money to see where you rank.

Remember these simple rules and you will be on your way to being much healthier.

• Know your net worth and do your monthly budget.
• Recognize and manage lifestyle inflation.
• See the difference between needs vs. wants and spend accordingly.
• Start saving early.
• Build and maintain your emergency fund.