Taking care of your health and going to the doctor for regular check-ups is something most of us take for granted. So why is talking about financial health considered a taboo subject so often? Especially when, according to the Financial Health Network, only 34% of U.S. households are financially healthy.
Imagine if financial health check-ups became the norm. What if checking the weight of debt, gauging the pressure of finances, taking the temperature of a budget, and preventative maintenance to avoid a financial disaster were commonplace? If this sounds good to you, you are not alone. Here are some “healthy” tips to help you get and stay financially healthy.
Weighing Debt
The first step in a physical check-up is getting weighed. Checking the scale is important for several reasons: ensuring a person is not over or underweight, evaluating the reasons for sudden changes, and for the doctor to prescribe the correct dose of medicine should the patient need it. To ensure your debt load is a healthy weight is an easy four-step process:
Step One
Keep a formal budget: The doctor keeps a record of your health, usually online, adds target actions to this record and uses it as a way to monitor and track progress over time. Finance is no different except your record is your budget. If you don’t use one, this can seem a challenging exercise – but with a user-friendly budgeting tool―this becomes second nature. One of the easiest ways to do this is using an online tool/app. There are many to choose from. Your Credit Union has a best-in-class online, interactive budgeting tool that is easy to start and maintain. Check it out.
Step Two
Assess Income: This means every source of income. Common sources of income are wages, self-employment, child support, alimony, public benefits, tax refund, gifts, etc. Be conservative with estimates of income that are not guaranteed, such as bonuses, overtime, and temporary employment. It is best to use net income or take-home pay when deductions are involved to simplify the process.
Pro Tip: If tips are a source of income, try to average the amount. If tip income is more than the average amount, add those funds to monthly savings to avoid budgeting gaps for the months where tips are less than average.
Step Three
Assess Expenses: Assessing expenses begins by making a list of items paid for each month. There are three types of expenses:
- Fixed expenses – occur monthly, and the amount is the same such as car payment, mortgage, and streaming services.
- Variable expenses – occur monthly, and the amount changes every month, such as electricity, water, and groceries.
- Periodic expenses – these are the forgotten expenses in many budgets. Periodic expenses do not occur monthly but do happen regularly, such as seasonal extra-curricular activities, tires for vehicles, and gifts.
Pro Tip: To make variable expenses realistic amounts, average the large and small bills and use the same strategy as tip income described above. When the actual amount is less than the average amount, add the difference to savings to avoid funding gaps when the bill is a larger amount.
Step Four
Analyze Results: This step is the moment of truth that includes determining the viability of the budget. For this step, subtract all expenses from total net income. If there is a surplus of funds—Congratulations! You have a viable budget, and the only thing left to do is plan what to do with that discretionary money. If the amount is a negative number, there are choices to make.
Pro Tip: A viable budget should include savings, entertainment, and miscellaneous spending.
Taking the Temperature of a Budget
The nurse takes the temperature of patients to ensure they are not sick. However, taking some time to review the family budget can determine if it is healthy or needs some care. The one rule of a budget is that expenses must never be more than income. If a budget is not healthy, then choices must be made. The two possible solutions for an unhealthy budget are increasing income and/or decreasing expenses.
Increasing income can be as flexible or structured as you choose. Here are a few ideas for increasing income:
- Selling items online such as clothing and home décor.
- Gig work such as providing rideshare or delivery services.
- Selling a service such as lawn work or cleaning services.
- Teach others using a talent, skills, and abilities.
- Using talent, skills, and abilities to create a product or service to sell.
Decreasing expenses could be a series of small or large changes, including:
- Economizing – Becoming more aware of spending and reducing when/where possible.
- Example: Planning meals to ensure there is no food waste.
- Reducing – Reducing the amount paid for items.
- Example: Shopping for clothes and accessories second-hand instead of retail stores.
- Comparison Shopping – Researching prices before making purchases to secure the best deal.
- Example: When making a large or emergency purchase, compare online to in-person shopping to find the best price.
- Elimination – Sacrificing discretionary expenses either temporarily or permanently.
- Example: Cancel all but 1-2 streaming services in favor of making more than minimum on credit card debts. Hint: rotate streaming services for the best outcome
- Substitution – Finding a less costly way to achieve a similar outcome.
- Example: Instead of buying a coffee from a coffee shop, brew your own at home.
Gauging the Pressure of Finances
Blood pressure checks determine if there are hidden health problems involving the heart. However, gauging how much financial pressure is too much doesn’t need to be discovered. Keeping a finger on the pulse of family finances is a great way to address issues before they become problems. If a negative pattern of spending is forming, the only way to keep it from becoming a future budget shortfall is to catch it early. By constantly evaluating budgets, it is possible to stop problems from reaching the point of significant concern.
And don’t forget that the Credit Union’s “financial doctors” are always in. One of the best ways of assessing your current state of financial health, and determining ways to improve it, is to get a free Financial Wellness Check. This relaxed, expert review of your finances doesn’t take long, and will highlight easy ways to enhance income and avoid potentially costly missteps. There’s no commitment and no pressure/selling – just impartial advice. Learn more here.
Components of Financial Health
The main components of financial health are healthy spending, saving, borrowing, and planning. A deep dive into the family finances at least once a quarter is a great way to check on each of these components. This deep dive should include:
- Evaluating spending ensures enough money for all essential expenses, savings, and hopefully some discretionary expenses. Also, check if any bills were late and research the cause to avoid future late payments.
- Check the amount in savings to determine if it is enough to cover 3-6 months of essential expenses. If the amount in savings is not enough, adjust the budget to include regular contributions to this fund.
- Make a list of all balances owed on debt to ensure it is healthy for the household income. If it’s not, take steps to reduce the debt.
Pro Tip: If the debt is at an unhealthy level, visit your financial institution to discuss a strategy to reduce interest rates and replace and/or consolidate higher-interest debt (including credit cards) at a lower rate of interest.
- Monitor assets to ensure they remain adequately insured and there is a plan for the estate. By adding life insurance, long-term disability, and a will, the whole family is protected from the unknown.
Like our physical health, financial health is determined by both circumstance and choice; changing either can profoundly impact financial stress levels. Finding a way to incorporate as many of the components of financial health will help keep our bodies and minds in alignment.
