All of our financial decisions and activities have an effect on our financial health now and in the future. We are often guided by specific rules of thumb such as ‘don’t borrow more than 2.5 times annual income to buy a house’ and ‘save at least 10% of your income towards retirement’. While many of these adages are time tested and helpful, it’s important to consider what we should be doing, in general, to help improve our financial habits and health.
Money comes in and money goes out. For many, this is about as deep as their understanding gets when it comes to personal finances. Rather than ignoring your finances and leaving them to chance, do a bit of number crunching to help you evaluate your current financial health and determine how to reach your short- and long-term financial goals.
Calculate your net worth, the difference between what you own and what you owe. Start by making a list of your assets (what you own) and your liabilities (what you owe) and then subtract the liabilities from the assets to arrive at your net worth figure. Your net worth represents where you are financially at that moment and it is normal for the figure to fluctuate over time. Calculating your net worth once can be helpful, but the real value comes from calculating this at least yearly. Tracking your net worth over time allows you to evaluate your progress, highlight your successes and identify areas requiring improvement.
Develop a personal budget or spending plan that can help you plan for expenses; reduce or eliminate expenses; save for future goals; spend wisely; plan for emergencies and prioritise spending and saving. Once you’ve made the appropriate projections, subtract your expenses from your income. If you have money left over, you have a surplus and you can decide how to spend, save or invest the money. If your expenses exceed your income, however, you will have to adjust your budget by increasing your income or by reducing your expenses.