The 6 Best Ways to Improve Your Financial Health

Everybody wants to earn more money, and become financially healthy. But if you don’t create good financial habits, earning more will not secure your financial future.

In this post, we’ll give an overview of the 6 best ways to improve your financial health. No matter what kind of financial condition you are currently in, you can develop smart financial habits today!

1. Calculate your level of net worth using a balance sheet

Companies use a balance sheet to measure their financial conditon, and so you can! While a balance sheet calculates a company’s assets and liabilities at a specific point in time, a personal balance sheet is a statement of your financial condition on a given date. It lists what you own and what you owe. To determine your net worth, you need to subtract your debt from your assets.

A personal balance sheet is an important financial tool to calculate your level of net worth. It tells you a lot about your financial status, which is based on the basic aquation:

The assets (what you own) listed on a personal balance sheet are monetary assets (bank accounts, money market funds, etc.), investments (stocks, bonds, etc.), housing (market value), automobiles, and other assets (furniture, jewelry, TVs, etc. – with their fair market value).

The liabilities (what you owe) listed on a personal balance sheet are current bills, credit card debt, mortgage loan, automobile loan, and other debt.

To calculate your net worth, subtract your total debt from your total assets. This represents your level of net wealth. If your net worth is positive, you have enough assets to cover your debt, which means you have more assets than liabilities.

If your debt are greater than your assets, then your net worth has a negative value. In other words, your liabilities outnumber your assets, which shows you’re insolvent. However, it’s not the end of the world. Once you measure your net worth, you can take steps to monitor and improve your financial health.

2. Analyze where your money comes from and where it goes using an income statement

While an income statement of a company summarizes revenues, expenses, net income, and earnings for a given period, a personal income statement shows where your money has come from and where it has gone during a certain period.

An income statement can help you track your income and expenses. It measures your inflows and outflows over time – which is useful to understand your financial position. If you have a positive cash flow, you can save and invest more money for your future. If you have a negative cash flow, you need to figure out why.

To set up your personal income statement, you need to write your income for a given period and subtract from your expenses.

While your income includes salary, bonuses, and any other sources of income you have, it’s hard to record your expenses. Because it’s difficult to keep track of all the things you spend. But to get a better understanding of where your money goes, you should record all your expenses like rent, loans, debt, utilities, groceries, and any other daily expenses you spend your money on.

By reviewing your income and expenses, you can see how your spending and saving habits may affect your level of net worth. Doing so helps you improve your financial health.

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3. Use ratios to monitor your financial health

The next step to improve your financial health, you need some ratios to monitor your financial well-being.

Calculating personal financial ratios are simple, if you have a personal balance sheet and an income statement.

Emergency Fund Ratio: Having an emergency fund helps you to plan for unexpected events and keep you from having to take on debt when you need money immediately. You can calculate the emergency fund ratio as follows:

Emergency Fund Ratio = Emergency Savings / Monthly Expenses

If you have $10.000 in an emergency fund and your monthly expenses $2.000, your ratio becomes five. That is; you have five months of expenses.

Savings Ratio: This ratio indicates how much you set aside and save for your future goals. The formula is as follows:

Savings Ratio = Monthly Savings / Monthly Income

To improve your financial health, you need to have a higher savings ratio. To do that, you should budget, set clear financial goals, and automate your savings.

Debt-to-Income Ratio: This ratio is an important part of your overall financial health. It shows what percentage of your available income is already going toward paying off debt.

Debt-to-Income Ratio = Monthly Debt Payments / Monthly Income

Expense Ratio: This ratio measures how much of your income you spend on your expenses. It helps you cut back your non-essential expenses. The formula is:

Expense Ratio = Monthly Expenses / Monthly Income

Solvency Ratio: It measures your ability to meet your financial goals -which measures whether you have enough assets to cover your liabilities or not. It is also known as the net worth ratio.

Solvency Ratio = Total Assets / Total Liabilities

Return on Investments Ratio: It measures the performance of your investments for one year. It’s calculated as follows:

Return on Investments Ratio = (Ending Investments – Beginning Investments)/Beginning Investments

4. Create a budget to track your income and expenditures

A budget helps you track your income and expenditures so that you can follow where your money is going. If you don’t know how to create a budget, the following steps can help you to do it!

Here’s how to create a budget in seven steps.

Create a budget in an Excel sheet: You need to check where your money comes from and where it goes.

Calculate your income: You need to state how much money you make each month. This includes your normal paychecks and any extra money you earn through a side hustle or freelance work.

Calculate your expenses: You need to list your monthly expenses like rent, utilities, loans, etc.

Calculate the difference between your income and expenses: When you subtract expenses from income, this number should be bigger than zero.

Label fixed and variable expenses: Fixed expenses are bills you can’t avoid such as rent, and utilities. Variable expenses are bills you can be more flexible like gym membership, travel plans, etc.

Set financial goals: You need to identify what you’re saving for and how much you need to save.

Review your progress: At the end of each month, you need to review your progress, and reevaluate your budget.

5. Start saving early to reach your financial goals

The sooner you start saving to reach your financial goals, the easier they will be to achieve. The starting point for saving should be as soon as you get your first paycheck! All you need to do is start saving and put it on autopilot.

There are some ways to save money to meet your future financial goals:

• Find Ways To Earn Extra Money
• Decide How Much To Save Each Week or Month
• Start Investing With Little Money
• Find Ways To Increase Income
• Change Your Home (If You Find Cheaper Home)
• Never Touch Savings
• Save Money On Transportation
• Stop The Brand Name Obsession
• Get Serious About Budgeting
• Save Money on Food

Take time to read this post! You’ll see them in detail in “10 Ways You Can Save $10.000 in a Year”.

6. Set up your investment plan to meet your retirement goals

You calculated your level of net worth using a balance sheet, analyzed where your money comes from and where it goes using an income statement, used ratios to monitor your financial health, created a budget to track your income and expenditures, started saving early. Now, it’s time to put them together in the form of an action plan. That is; it’s time to set up the investment plan!

To get started investing, you should determine a strategy based on the amount you will invest. Once you have saved some amount, which is about $1000, you’re ready to start investing. If you don’t know how to start, stocks and mutual funds can be a great way to start.

Here are some tips to set up your investment plan:

Start investing early and consistently: Investing early and consistently when you’re young is one of the best ways to take full advantage of returns on your money. Your investment returns start earning their own return thanks to compound earnings. Also, when you build wealth systematically through investments, it’ll improve your spending habits.

Choose your investments by diversifying your portfolio: You need to find investments that fit your financial goals and choose the different types of investments by diversifying your portfolio. Remember that you should never put all your investments in one security.

Decide how much to invest: When you choose your investments, you need to decide the amount of money you’ll invest in each investment type. How much you’ll put in depends on your financial goal.

Measure your risk tolerance: Different people have different tolerances for risk. You need to measure your risk tolerance because it is one of the most important factors that affects which assets you’ll add to your portfolio. If you don’t worry about short term downs in your investment, you probably have higher risk tolerance. If you worry with short term downs, you may have a lower risk tolerance.

Build an investment portfolio: Select different combinations of assets that are best suited to help you reach your financial goals. Some common investments to include in your portfolio are stocks, bonds, short term certificates of deposit accounts, mutual funds, exchange traded funds, commodities, real estate, etc.

Plan for retirement: Imagine your ideal retirement and learn tips to make it a reality. Make sure you make continuously contributions for your retirement. If you want retirement to be successful, you need to estimate how much you’ll need during retirement years, and determine how much you need to save annually between now and retirement.

Related: 10 Steps to Become a Millionaire in 10 Years (Or Less)

The Bottom Line

If you want to improve your financial health, you’ve got to track where money comes from and where it goes. To do that; you should use ratios to monitor your financial health. We know you can do it after reading this post!

Never forget that improving your financial health starts with measuring a few things like your debt, savings, income, and investments. That’s why you should read articles in Personal Finance and Financial Literacy section! They’ll really help you improve your financial health!