Financial Hygiene & Health |

  Financial Hygiene & Health

Financial health is a term given to one's overall financial wellbeing, security, and stability. Financial hygiene is the actions and habits that impact our overall financial health. Like personal hygiene, financial hygiene needs regular consideration, and maintaining good levels of hygiene can avoid many bigger and more serious issues.

Think of financial hygiene as the equivalent of washing hands, sanitising, eating healthy, exercise, regular check-ups, and most importantly spotting issues very early on - all help towards good general health. No doubt there will be unforeseen issues but starting with good health gives us a better chance of survival and a quick recovery.

There are no hard and fast rules to financial hygiene as it is more a mindset rather than a skill but here are some general steps one can take to continually improve our financial wellbeing.

1) Know where you stand

The only way we can measure progress and know if we are making improvements is to create a baseline or snapshot of where we are today. This snapshot is calculated as:

Assets - Liabilities = Net Worth

Bear in mind that the RDPD definitions of asset and liability do not apply here.

Assets are any possessions that you believe have value and can be sold if required, This can include cash, investments, property, car, jewelry, gadgets, household items. If you include gadgets and household goods then make sure you assign current market value and not purchase price.

Liabilities are money and debts that you owe to the bank, people, and others.

It doesn't matter what your net worth is to start with - high, low, or even negative but it is important you know where you stand today.

2) Track Incomings and Outgoings

The other knowledge we must have is where our money is coming from and where it is going. Take a piece of paper and start writing down what you earn from all your sources and also write down what you are spending it on. It is important that you do this for the first time using pen and paper, it slows you down, makes you think about everything, and writing down where you spend your money adds to the pain which we will use to our benefit in the next step.

As you are writing down your incomings question if you are earning your true worth. Are you getting paid a fair salary? Is it time to have that promotion discussion you have been putting off? Is there a skill you can monetise? Do you have spare hours to upskill and find a better job or start a side hustle? If you have multiple income streams then are they optimised? Can they scale? Can you go full time with any of them?

Same with your outgoings, are they necessary? Can they be reduced? Put a * next to those that can be reduced or eliminated.

3) Create a Budget

Use the information from step 2 and create a simple budget, there are many templates and Apps available that can help. Sometimes categorising our spending helps us realise how much we are really spending on things like clothes, entertainment and eating out.

Having a rough budget helps us live within our means and keeps us on track towards goals. I know people that track down to pennies but we don't need to go to such detail as that itself takes time that can be spent elsewhere.

It is important the budget is realistic otherwise you won't stick to it.

4) Save

I know this one is easier said than done. With the ongoing pandemic, people all over the world are struggling to make a living let alone save but hopefully, this time shall pass and this post will stay relevant for a while.

How much to save depends on a number of things including the budget you created in the previous step. Your job security, number of dependants and overall risk tolerance defines how much you should have in your rainy day fund. Many years ago I would try and have the equivalent of 3 months of my monthly budget whereas now with kids and other responsibilities, I like to keep 6-9 months of expenses as a cushion.

Many people work out how much they want to save and put that aside first every month and then spend rather than save what is left at the end of the month. This is good discipline.

5) Invest

We only want to save just enough for a cushion against any financial shocks or to meet aa short term financial goal (wedding, holiday, university fees, Hajj etc), everything beyond that should be invested to protect your hard earned savings from inflation.

Where you invest depends on you, your skills, your risk appetite, and even where you live. You can invest in yourself if you feel a new skill will help you improve your income, work environment, or work life balance. You can invest in a side hustle business, stock market, property, crypto, etc

When it comes to crypto, many people ask how much of their portfolio they should have in crypto and I usually say that 10% of my net worth (from step 1) is probably the most I would risk for now and adjust as the technology matures. At my age, I feel I can recover from losing 10% of my net worth. If you are younger you can take more risks because (on average) you have longer to recover.

The art of making money from money, and not time, is a key skill to have otherwise we will continue to swap our time for money until we run out of it.

6) Improve Financial Literacy & Awareness

This is a pretty loose action but it means to make yourself aware of the basics of finance that will impact your day to day life, know how depreciation works, the benefits of compounding, being able to spot opportunities and smell a scam. How the banking system really works etc

There is probably a lot more we can do but making the above your habit should go a long way to understanding and improving your overall financial health.

Thanks for reading this far and I hope this was a useful post. Share it if you feel it may help others and comment anything you feel I can add to the article.

Finally, I would just like to add that I know that a balanced life is a lot more than good financial health, but from my many years of experience in the financial industry, and from speking with thousands of people every month, I also know that mental health, physical health, and financial health are very dependant on each other and it is important that we take care of all three. You can find better sources than me for the other elements of a well balanced life.