Meta description: One in three people feel anxious about their finances. Ease those worries with these tips for evaluating and improving your financial health.
Money might not make the world go around, but in this cost of living crisis, we’ve never needed it so badly.
According to the Mental Health Foundation, one in three people feel anxious about an inability to pay their bills. Meanwhile, foundation chief executive Mark Rowland reports that there are now ‘…clear links between financial strain and poor mental health.’
So, financial health is increasingly vital to our general well-being. But, as financial stability becomes harder for even high-earners to achieve, this is an increasingly difficult act of self-care to get right. In fact, according to the Office for National Statistics, price increases over the past year have seen a fifth of adults borrowing more money.
Those figures paint a bleak financial forecast. But, according to financial planner, Liz Frazier, financial literacy is key to staying afloat. She claims that many of our current financial struggles ‘…could be avoided with some basic knowledge.’
But what must we know about our finances to overcome these current setbacks?
Contents
How to Evaluate Your Financial Health
You wouldn’t jump into the gym without testing your physical fitness first. Equally, you need to evaluate your financial health before you can improve it. Often referred to as financial literacy, this level of understanding can inform your ability to spend responsibly, stick to a budget, and make space for savings. All of which are key to future financial health.
Financial literacy should generally begin with evaluating key financial metrics such as –
- Your net worth: Net worth varies depending on age, and can be calculated by subtracting your liabilities (debts, etc.) from your assets (earnings, investments, etc.). Ultimately, achieving a ‘good’ net worth means spending less than you earn.
- Levels of debt: Understanding your current debt level can help you to break free from vicious financial cycles. It requires consideration of things like debt timelines and new yearly debts vs the amount of money you pay off in a year.
- Credit score: You should check your credit score at least annually. This allows you to monitor potential mistakes or fraudulent activity. It also enables you to track things like debt repayments and credit management.
- Savings: You should ideally have enough savings in the bank to cover between 3-6 months of expenses. By calculating how much this amount should be depending on your income, you’ll be able to set a realistic savings goal to aim towards.
How to Improve Your Finances
One in two UK adults aren’t confident managing their finances day to day. Luckily, there are some simple self-help steps that we could all take to improve our financial situations, and they include –
Calculate a Personal Budget
Qualified accountant Loren Forbes states, ‘Budgeting can help you achieve your financial goals, affording the lifestyle you aspire to and helping with forward planning into retirement.’
To calculate your budget, start by considering general expenses like –
- Childcare
- Debts
- Food
- Housing
- Insurance
- Utilities
- Transportation
- Etc.
By deducting these expenses from your income, you’ll then be able to consider things like any necessary changes and any surplus you have left for savings, pensions, etc. You should adjust your budget alongside any financial changes. Generally speaking, aim to stick closely to your plan to feel its full financial benefits.
Create a Debt Payment Plan
A debt plan can help you to clear your debts as quickly as possible. It’s best to achieve this by avoiding taking on new debts or using credit to cover your expenses, which should already be manageable if your budget plan is solid.
You should also aim to pay your existing debts as quickly as possible. While it makes sense to begin clearing your highest-interest debts, it can also help to clear your smaller debts first. Then, you’ll be able to dedicate more funds to clearing large debts that previously felt unmanageable.
If you’re dealing with a lot of debt or are falling behind on payments, debt management plans can also be useful. However, Bankrate does highlight potential downsides, including possible damage to credit ratings and an unwillingness from some lenders.
Automate Your Savings
Just one in six UK adults have savings. This is despite the fact that experts claim the average adult should have around £51,434 or the equivalent of their annual income, in the bank by the age of 30. Insufficient incomes and high expenses are largely to blame for this discrepancy. But, saving even small amounts of money each month can make a difference.
With the help of your budget, you should already know roughly how much you can afford to set aside each month. You can then make those savings goals more realistic by automating the saving process.
Doing this will take all of the thinking out of your savings goals, and can ensure that your money goes directly towards savings pots including high-interest accounts or even pension funds. In some cases, you may even be able to arrange for a certain percentage of your pay packet to land directly in a high-yield savings account. This ensures that you’re saving a decent amount and that you’re never at risk of accidentally using that money for anything else.
Invest More of Your Income
It’s worth increasing your investments using any surplus in your budget. Most simply, this could involve increasing your retirement contributions by a set amount each month. Even one or two extra percentage points, which shouldn’t have a major impact on your income, will be hugely beneficial to your future.
If you want to take this benefit further, and have the spare cash flow to do so, you could also work with experts to begin developing an investment portfolio. This will be based on assets that typically include shares, bonds, and alternatives. Your portfolio could range from safe to adventurous based on your financial forecast. By regularly rebalancing back to a comfortable level of risk, you should be able to make sound financial investments that work for you.
Make Mindful Spending Choices
Mindfulness is key to self-care in all areas, and spending is no exception. In the same way that you’ll continually need to rebalance investment portfolio risks, financial self-care requires you to pay close attention to where you’re spending, and why.
Of course, to some extent, you need to live your life. If your budget after saving provides you with surplus money, then you don’t need to overthink where that money goes. But, if you’re overspending in certain areas, or are struggling to secure savings, then mindfulness can certainly play its part.
For financial self-care, it’s especially important to recognise your needs vs. wants. This will help you to understand your non-negotiable and optional spending. According to financial coach Yasmin Jama, this mindful approach also means that ‘…you’re more likely to make choices that are in line with what’s most important to you.’ For instance, you’ll be able to cut unnecessary expenses like television subscriptions, to better afford a passion for travel or something similar. This outlook can help to take your budget further. It can also have a huge impact on your financial happiness overall.
Find a Better Financial Future
It’s difficult not to feel bleak when considering current financial forecasts. But as experts like Liz Frazier point out, we’re not helpless. Developing a firm understanding of your financial health, and the different ways that you can improve it, is key to managing escalating issues like rising lifestyle costs. Simply put these vital financial self-help pointers into action. Then, re-evaluate your finances regularly to keep spending in check.
Summary
Recent years have seen our finances taking more of an emotional toll on our lives than ever before. Now, one in three people report anxiety about their ability to pay the bills. And, with one in two UK adults lacking confidence in their ability to manage day-to-day finances, it can seem like there’s no way out of this cycle.
But, experts are continually reminding us that this isn’t the case. Financial planner Liz Frazier believes that just basic financial knowledge can help us out of this rut. In particular, financial literacy, which makes it possible to evaluate and improve our financial situations, could help us to get a handle on our money worries.
By conducting a financial evaluation, it’s immediately possible to bring your finances under better control. This is because evaluations give you a firmer grasp of key financial metrics like your net worth, your debt level, and your credit score. Those metrics then make it possible to implement all-important improvements to your financial health.
A personal budget is an especially vital financial self-help lifeline. With that budget in mind, you can implement further improvements including saving and debt repayment plans. Wise investments are also easier to make when you know exactly how much surplus money you have. And, if there isn’t enough in the bank, then a mindful approach to spending could be a great step towards self-care, and a better budget overall.
In this article, we’ll help you to evaluate and improve your financial health so that you can put your money worries to bed at last.