Proper money management gives you a sense of security: You can handle any unforeseen expenses and life situations. Do a financial health check to see what you’re doing wrong with your money and to make adjustments.
Financial health – is the state of your personal finances. Along with physical and mental health, financial health lays the foundation for a safe and favorable future.
According to the Financial Health Network, only 29% of Americans are financially healthy. Because of the pandemic 33 million people in the U.S. were left unemployed, in Russia officially registered as unemployed 2 million people. Since many people live from paycheck to paycheck, the remaining 71% met the quarantine and the crisis unprepared.
The symptoms that signal:
- Your financial health is at risk
- You don’t know how much you spend per month.
- You’re not generating passive income.
- You use consumer credit frequently.
- You don’t use cashback.
- Your investment returns don’t cover inflation.
- You’ll take out a loan if you need medical treatment or your refrigerator breaks down.
When evaluating your financial situation, analyze whether your budget meets your financial goals – this is the main criterion.
To understand whether a person manages his personal finances well, you need to analyze how well he has managed to adjust the structure of his capital to his own financial goals and objectives. Since everyone’s goals may be different, people’s actions may differ as well. For example, those who plan to buy real estate will behave more conservatively than those who are saving for retirement
or who want to accumulate capital.
How to improve your financial health
1) Reduce debt payments to 20-30% of income
The credit load (debt to salary ratio) of Russians is 47.1%, which is significantly higher than the norm. When your borrowing costs exceed 40% of your capital structure, the bank will not approve a loan for you.
Calculate your equity: it shows the assets you really own. First add up all your assets: real estate, cash, deposits, investments. And then subtract your total debt from that number. Take into account all your debts: credit cards, mortgages, debts to friends. The resulting amount is your equity. If you own an apartment worth six million rubles, but you still have a mortgage on it for five million rubles, your equity capital is one million rubles.
Getting out of the debt hole, the first thing to do is to sort out the “expensive” high-interest loan and pay it off. If possible, refinance the debt. That is, take out a new loan from another bank to pay off the old one.
2) Build up a safety cushion.
This is a reserve of money for unforeseen circumstances. For example, if you lose your job, you’ll have a reserve – savings that you can live on without getting stuck in debt.
You can calculate your financial cushion this way:
- Determine the length of time in which you can look for a job or new clients in the worst case scenario. Usually you have four to six months to do this.
- Open the bank app and calculate how much you spend on fixed costs: rent, food, utilities, loan payments, transportation (car service or passes), communications, medicine and education. And multiply that value by the number of “crisis” months.
The cushion should not be spent even on big goals like buying a car or real estate. It is your confidence in the future and security.
If you already have a safety cushion and money for short-term financial goals, it’s time to think about investing and opening a brokerage account. You can start investing with 50-100 thousand rubles – you will put together a portfolio of several instruments and you will earn a tangible income.
3) Start saving for retirement right now
Set aside 10-15% of your income for retirement and emergency reserves. Set up automatic deductions from your current account to a deposit so that no excuses get in the way of saving. To do this, simply choose a date and an amount to write off.
You can increase your savings if you invest for the long term – you’ll have more time for cumulative growth. Build a “retirement” investment portfolio of protective (OFZs and corporate bonds) and risky portions (dividend stocks, ETFs) depending on your risk profile, and reinvest the coupons and dividends you receive. With such passive investing, the portfolio can be reviewed only once a year.
4) Control Lifestyle Inflation
If you get a raise today, will you spend more? An increase in spending in proportion to an increase in income is called lifestyle inflation. It seems quite natural: after a promotion in your career, move from a one-room apartment to a two-room apartment, go on vacation to Rome instead of your hometown – what are we earning then, if not for comfort. But the constant increase in lifestyle inflation can lead to the fact that you still can’t buy a car without a loan, even though the cost of the car is 4 of your salary.
Train yourself to distinguish needs from wants. Needs are what you need to survive – food, shelter, transportation, medicine. When you work out your personal budget, first plan for credit deductions, mandatory expenses, and savings for goals. And only after that, consider entertainment expenses – no more than 30%.
5) Take out insurance.
Insurance protects you and your belongings from life events that can take away your standard of living. Accidents, fires, illness and theft will bankrupt many people without good insurance.
Let’s break down how insurance works with an example. Let’s say you take out life insurance. With it, you can create a financial reserve and insure your life and health. The program assumes fixed contributions – the amount you determine yourself. If an insured event (injury, death, illness) occurs, you or your relatives specified in the contract will receive money to cover the damage. If an accident doesn’t happen, you get back the money you’ve saved when the contract ends.
1. Financial health is the state of your personal finances.
2. If you don’t know how much you spend per month, or your capital structure is not adjusted for financial goals, you need to address your financial health.
3. The basis of financial security is made up of: a financial cushion, paying off loans no more than 20-30% of your income, insurance, saving for retirement, and controlling lifestyle inflation.