Here are five ways in which you can improve your financial health

Financial health is defined as the state of an individual’s finances; where one stands in terms of their monetary situation.

Here are some financial health strategies that will help you attain long-term stability:

Having clarity on your needs and desires

It is essential to distinguish between needs and desires; spending mindfully is critical for making healthy financial decisions. A simple rule can be used for easy classification – anything which is required to survive can be classified as a need, the rest are desires/wants. It is completely fine to treat yourself with outings and dine outs from time to time but if non essential expenses are high month on month, it is necessary to re-evaluate spending behavior. While planning expenses, essential spends should take priority in personal budgeting, with excess available for savings and aspirational or fringe expenses.

Committing to saving and investing policy

Commiting towards savings and investments makes a lot of difference. The sooner you start, the easier it is to achieve long term financial goals – you will have to invest less principal for achieving the same goal in the future. With compounding interest, both the principal and interest are reinvested resulting in better gains over a long time period. It is essential to develop the habit of disciplined investing depending on one’s risk appetite. There are multiple investment options which have different risks associated with them like Fixed / Recurring Deposits, Mutual Funds, Stocks, PPF accounts, etc. You should carefully evaluate the risks and rewards associated with making specific investments. A good practice is to save at least 20% of your income and diversify your investment across risk profiles to optimize your gains.

Planning for contingencies

No matter how much we plan our finances, there will always be unforeseen circumstances that we have to face throughout our life. Well as the name suggests, the fund is intended to finance emergencies such as accidental home or car repairs, sudden medical expenses or even giving oneself some buffer in case of income or job loss.

The traditional guideline is to set aside at least six months worth of income as a part of the emergency fund. The best practice is to include this as a necessary expense in your budget planning and ensuring you are not spending the same carelessly. Another thing to note is that establishing an emergency fund is an ongoing process. It is imperative to be financially ready instead of feeling overwhelmed while dealing with emergencies.

Managing Lifestyle Expenses

With time, learning and experience, you are likely to make more money as well. An increase in income usually results in an increase in lifestyle expenditure – a phenomenon known as Lifestyle Inflation. This can hurt in the long run as it interferes with the ability to build wealth. As your personal and professional situations change over time, it is natural to observe an increase in expenditure. But, while you increase your expenditure, it is also essential to increase your financial goals. Keep Lifestyle Inflation in check by staying on top with your financial goals, leverage increased income to contribute more towards savings and investments, and boost your emergency funds.

Do the Math – Plan for a better future

Prioritising some effort to do calculations is beneficial while dealing with personal finance. Rather than avoiding the effort and resigning to the outcomes determined by externalities, number crunching can help you evaluate your current financial situation and provide clarity on how to achieve short-term and long-term financial goals.

This involves more than inflow and outflow of money. The calculations should be around your net worth, which gives clarity on your assets (what you own) and liabilities (what you owe). Net worth is calculated as assets minus liabilities. It is a good measure of your current financial standpoint. Tracking your net worth repeatedly over time enables you to set data backed goals, evaluate your progress and develop plans for areas that need improvement.

(The writer is AVP – Risk, Capital Float. Views expressed are personal)