Getting financially healthy has a lot in common with getting physically healthy. A good bit of that health comes from willpower – the self-control we all use to do the things that aren’t necessarily fun but will help us in the long run. Willpower is like a muscle; the more you use it, the better shape it will be in.
One smart way to harness your willpower is to track your habits and hold yourself accountable for your actions. When you’re focused on physical health, tracking your habits may entail keeping a log of what you eat or how you exercise every day. Through those written records, you’ll see tendencies emerge that you may not otherwise notice.
For instance, you may mindlessly eat a few pieces of candy from a jar on a co-worker’s desk every time you walk by. If you don’t track those extra calories, you may wonder why you aren’t losing weight. Keeping a calorie count would force you to acknowledge that extra sugar intake so that you could encourage yourself to avoid the candy jar in the future.
The same idea can be applied to financial fitness. Like a food journal, an expense tracker can help keep you aware of and hold you accountable for your financial habits. You can identify what areas you need to improve in and understand what changes you need to make to trim the “flab” from your monthly expenses. Ready to improve your personal finances? Continue reading for tips on how to detox and refine your budget.
What it Means to Get Financially Fit
What does financial health actually mean? It’s not a measure of how much money you make. Someone could earn a significant salary and be unhealthy financially, while another person may make half as much and be on solid financial ground.
The key to being financially healthy is knowing where your money goes and whether or not your money is being spent wisely. For example, you could have low cash flow each month because you’re putting away money for your retirement and your child’s college fund. Those are worthy investments. But if you have low cash flow because you keep buying expensive shoes or golf clubs you can’t afford, you need a financial diet plan.
Why is Financial Health Important
You may be wondering what the big deal is. So, what if you don’t have a budget? You can afford groceries and pay your bills each month without one.
But if you’re using up all your income for your current needs instead of paying off debt or saving for retirement, you could have problems down the road. A monthly budget helps you plan ahead and get the most out of your money.
How to Tell if You’re Financially Fit
Ask yourself these four questions:
- Do you know how much money you make and how much you spend each month?
- Do you know exactly how much debt you have?
- Do you have at least one retirement account?
- Is your credit score above 700?
If you answered “no” to any of these questions, chances are you are not financially fit. You need to take immediate action.
How to Make a Budget
Gather your financial information. Start with paystubs and monthly bills. To begin your move toward financial health, you should establish a budget.
Create a monthly personal budget to help keep you on track. Be sure to include these things in your budget:
- Your net monthly income
- Mortgage or rent
- Bills (including phone, Internet, utilities, etc.)
- Loan payments (including car, college, etc.)
- Credit card payments
- Savings contributions (such as 401(k) or IRA)
- Groceries
- Childcare
- Subscriptions (such as streaming services or gym memberships)
- Insurance (including life, dental, health, etc.)
- Other healthcare expenses (like contact solution or prescriptions)
- Alimony
Your budget will show you how much money you bring in and how much goes out toward necessities. Next, you’ll want to reconcile the difference between those two. If your monthly payouts are already more than what you bring in, you have a problem.
If there’s money left over, you can decide how to allocate your funds. You may need to beef up your emergency or retirement savings. Or perhaps you want to budget for entertainment, put it toward a home improvement project, or funnel it into savings.
For those with credit card debt, paying it down is a smart investment since there is interest on that debt. If you have a student loan with a high interest rate, you could put extra money toward it each month just by giving up a trip to the movies or dinner out with friends.
Many people like the 50-30-20 plan for budgeting. You set half of your income aside for necessities, use 30 percent for your personal wants, and allocate the rest to savings or paying off debt. This keeps you from feeling deprived and ensures you still put away enough money.
Save Yourself in the Long Run
By listing all of your financial obligations on one page, you become aware of where your money is going and can hold yourself accountable for paring down your debts. You can further cut the extras by considering other ways to save. Is your monthly gym membership worth it if you just run on the treadmill when you could run outside for free? By recognizing certain tradeoffs, you’ll find ways to gain financially.
Remember to revisit your budget each month to tweak and refine it. A budget isn’t set in stone. It evolves with your life and your needs.
This is part one of a three-part series on how to get financially fit. Part two will examine how to get your credit in shape. Find more money management tips and resources on our website.
FINANCIAL HEALTH PART 2: Get Your Credit in Shape
