Improving Your Financial Health

By Ryan Brady

We recently wrote a blog about how to effectively budget your money. While incorporating that advice into your routine will undoubtedly assist you in spending responsibly, there is still so much to learn when it comes to your overall financial health. Following the tips below will allow you to establish sound financial habits that will extend beyond budgeting, and help you on your journey to financial security.

Create plans for your money

You make plans for running errands, meeting personal goals, and cooking dinner. Why not make a plan for your money? If you have goals for your finances, creating a plan will help you to achieve them. If you aim to have a certain amount of disposable income within a specific timeframe, create a savings plan that works for your lifestyle. Automate this process easily through your bank’s app or website by setting it to transfer a certain amount of money from your checking to your savings account on every pay day. Doing so will ensure that you stay on track with your saving goals. Most financial advisors suggest saving at least 10% of every paycheck to “pay yourself first.”

If you feel unsure about how to plan out your finances or create an effective savings plan for your needs, you can always talk to a financial advisor. There are also digital saving apps—like Digit, Chime, Acorns (also investing), Empower Finance, and Qapital—that can help you automatically save money.

Consider investing

While there are endless approaches to investing, and there is no proven method that is always successful, keeping the following advice in mind will assist you in making good decisions with your money. If you are interested in investing, make sure you understand the investments that you plan to make and realize that no investment is fool-proof. Before you invest, ask yourself why you wish to invest in that particular asset. Then determine what would make you sell that position—events like a fundamental change in a business’ structure that affect its future and limit its growth, such as the company losing a major customer, the company moving in a different direction, a major competitor emerging, or your expectations for your stock not coming to fruition. Reflecting on your tipping point—when you would sell your stock—will allow you to make rational decisions in the future so that you can avoid buying high and selling low.

You can also buy stocks in pieces. A popular approach consists of investing in “thirds.” This entails dividing the money you want to invest in a certain company by three, and then investing each third at a different point in time over the course of the company’s growth. Doing so will allow you to get a feel for what the returns may look like before investing all of your money, as well as to mitigate downside risk. You can also use this approach before a company goes through a major event—such as a change in leadership or launching a new product. Then invest more money if the company is performing well and divert the money if it is not.

Manage lifestyle inflation

When people have more money to spend, they will often spend more on nonessential goods. This is called lifestyle inflation, and it limits your ability to save. Reduce the impact of lifestyle inflation on your budget by being very mindful of what you buy, as lifestyle inflation often starts with small purchases that ultimately lead up to large expenses. Recognize that every dollar you spend on a luxury is one less dollar that contributes to your long term financial goals—whether those are paying off debt, saving for a down payment, or retiring.

When you get a raise, alter your budget gradually. Similar to the rule of thirds for buying stocks, try investing less money than you would like in lifestyle changes to test the waters and determine whether those expenses will truly increase your happiness. If it does not, you can stop investing in them before you have spent too much.

One easy way to head off lifestyle inflation is to ask yourself how much more you are willing to spend on your wants before you get a raise. Then, if you do get a raise, you have a guideline created when you had a different financial perspective and were not distracted by the excitement of suddenly having more disposable income. Planning this way allows you to avoid the temptation of spending too much and therefore stick to your financial plan.

Pay your bills on time

Because the most important factor in determining a credit score is your payment history, not paying your bills on time can significantly affect your credit score, which can bar access to financial benefits like lower interest rates, favorable insurance costs, and large purchases. A sure-fire way to protect your credit score is through automating bill payment through your checking or credit card accounts. Some companies will also apply discounts for automated bills or paying paperlessly. Check out this guide for more information and how you can automate your bills and avoid a poor credit report.

Create a rainy day fund

Lastly, prepare for the unexpected. You can plan out all of your finances meticulously, but if you do not save enough for emergencies, then one auto repair, appliance failure, or injury can put you on the road to mounting debt. Accounting for emergencies in your monthly budget will help protect you from being blindsided when an unanticipated expense arises. To do so, you can automate as much as you can spare from your salary to transfer to a savings account every pay day, or simply start an emergency fund with extra cash in your budget.

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