Things to Consider in Order to Have Healthy Personal Finances

Things to Consider in Order to Have Healthy Personal Finances

16/08/2022

According to a study, the number of people with bad debts in their credit records in the U.S. is 64 million, representing 28% of the population. It’s a worrying situation because most people are in debt due to financial mismanagement.

Debts are not necessarily bad because they help you buy property, pay for emergencies, or an urgent car repair and renovation.

In this discussion, we walk you through things to consider in order to have healthy personal finances. Keep reading.

What is Personal Finance Management?

Personal Finance Management

Personal finance may seem intimidating and make most people avoid budgeting, thus leading to poor financial outcomes. It’s important to plan by having a list of your expenses and income to manage your lifestyle and live within your means. 

Proper planning involves being careful of how you spend your income regardless of how much you earn. When you save early, you can reap enormous future benefits if your money earns interest. Also, have an emergency fund to take care of your needs during a rainy day. 

That said, here is what you need to do in order to have fulfilling and healthy personal finances.

Know Your Net Worth

The nature of income is that money comes in and goes out in the form of expenditure. This is the cornerstone of your journey to achieving healthy personal finances. Instead of engaging in impulse buying, you can crunch up the numbers to evaluate your income and expenses. Doing this lets you establish how you will meet your financial goals.

The first step is to estimate your net worth, income minus debt. When you receive your income, calculate your worth by listing your assets against the liabilities. If your net worth is negative, you’re not doing well, and your financial health is at risk. On the other hand, a  positive number means you’re financially fit and can spare some portion for savings. 

By calculating your net worth, you can evaluate your financial journey, list your success, and note the areas you need to improve.

Have a Budget

Have a Budget

A budget is crucial because it helps you not to overspend beyond your means. Most people who fail to budget end up accumulating credit card debts and falling into a debt trap. With digitization, you can get several budgeting tools that can help you plan for future expenses. Eventually, you can reduce impulse buying and save for the future.

Preparing a personal budget involves predicting your future income and costs. You can categorize the costs and incomes depending on the most current needs. 

Here we draw up a table to highlight what a personal budget should look like.

Income Type Expense Type
Salary/wagesDebts payments (Mortgage, car loan, student loan, credit cards, online loans etc.
TipsHealth emergencies( drugs, therapy,etc)
Interest IncomeUtilities ( Water, cable, electricity, internet, postage etc)
Dividend IncomeHousehold expenses( Food, grocery and dining out etc)
Retirement IncomePersonal expenses( Hair care, clothing , gym subscriptions etc)
Social SecuritySavings( Education fund, endowment fund, retirement savings)
Disability BenefitsFamily vacations, weddings, birthdays, Christmas celebrations, Thanksgiving etc.
Alimony incase if divorce or separationTransport expenses ( gas costs, tolls, subways, parking etc.)
RentInsurance( Auto, medical, homeowners etc)
RoyaltiesOther costs; emergency repairs, renovations etc)

After making the above projection, check whether you have any surpluses and decide whether you want to spend, invest or save.

If the expenses are higher, you can boost your income by working overtime, finding a second job, or doing a side hustle. You can also adjust your budget by reducing expenses.

Manage Your Expectations

Some people spend a lot of money if they have multiple income sources or are generally well off.

As you advance in your career, you’ll expand your income base and spend more.  Further, as you climb the social ladder, you may want to buy new and trendy clothes, hang out in expensive places, and probably buy the most high-end vehicle. 

Even if you have a lot of money, spending a lot without a plan can be detrimental in the longer term. Every amount you spend right now impacts your retirement savings. 

Moreover, a high income now doesn’t guarantee the same in many years, especially if you’re not saving. It’s essential to manage your expectations by limiting how much you need to spend. Every time you enter a different phase of life, be sure to evaluate your budget so that it reflects the current conditions.

Start Saving Now

Start Saving Now

Whether it’s your new job straight out of college or you are moving careers, savings should be an essential aspect of your budgeting.

It’s not too early to think about your retirement, and the value of money now won’t be the same in a few years. If you save early, you’ll reap massively in your retirement when you start receiving the payouts. 

Here is a table to demonstrate how this works;

Age To Start SavingInitial SavingAt 40 Years ( Assuming you earn 5% interest every month)Investment at 60 years
Amount saved at 20 years$655 per month$314,544Over $1,000,000
Amount saved at 40 Years$2,433$583,894
Amount saved at 50 years old$6,440$772,786

As you can see, if you start saving early at 20 years, you’ll hit the millionaires club by the time you’re 60.

By contrast, if you start saving late, you need to set aside a higher amount, which will be a tall order to get past the $1,000,000 mark when you hit 60 years.

Tell the Difference Between Needs and Wants

Most of the time, individuals are unable to save because they can’t tell the difference between needs and wants. Whereas needs are typically things, you can’t survive without, wants facilitate your day-to-day living. 

For example, food, shelter, and clothing are human needs. On the other hand, a car is a want since you can use it to move from point A to B.  Always ensure needs are at the top of your personal budget, and afterward, allocate some money for your wants.

Think About Emergencies

Emergencies are bound to happen anytime without prior notice. Unfortunately, most people are caught unawares, and you may have to borrow from friends and relatives or take out loans.

As a general rule, it’s important to have an emergency fund to take care of unexpected expenses in the future. In this way, you’ll be financially ready if an emergency occurs, and you can start re-building the funds.

Improve Your Credit Score

Improve Your Credit Score

A poor credit score can sabotage your financial goals by denying you the chance to borrow from banks or financial institutions. 

Even though some institutions can offer you a low credit loan, it’s important to take steps to improve your credit score. 

Here are some things you can do to boost your credit score;

  • Debt consolidation
  • Pay your bills on time
  • Having only one credit card
  • Adhere to the credit utilization rule of 30% to avoid exceeding your credit card limit
  • Pull your credit report to identify open accounts that may accumulate interest and charges.

Conclusion

Having healthy personal finances may seem like a daunting task if you’re already in a crisis. However, if you adopt the above valuable tips, you can improve your financial situation and meet your short-term and long-term goals.

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