Financial Health: The Ultimate Goal!
Play the Money Game the right way.
We bring to you today, what we believe is, the best Introduction to Financial Health you’ll find on the Internet!
We have realised that the information about this crucial topic on the web is weak and fragmented.
We want to change that.
By the end of this extensive & comprehensive article, We want you to have a concise and clear understanding of the Why, What and Basics of the How to achieve Financial Health!
So you and us, together, can initiate our journey towards a better financial future.
Is your better future worth 32 minutes of your time today?
If not, you can always come back tomorrow. 😉
Before we can even begin talking about financial health, we must clarify what Money is.
So what is money exactly?
Money is solely a tool, imposed by Society on people, with the purpose of engaging in the process of increasing one’s quality of life by acquiring goods and services.
That’s it!
It’s not status, it’s not worth, it’s not respect.
You can be an individual with a lot of money and still be worthless as a person.
Don’t feel bad if you saw money as more than a tool.
We were all taught the same thing. We all have suffered a great disservice from Society.
Probably one of the Top 10 Disservices ever served in our Human History. What do we mean by disservice?
We mean that there is a Money Game.
And like all games, this game has a Finality. That bifurcates into two possible outcomes:
* Become Financially Healthy, which is what everyone should be;
* Build Wealth, for the more ambitious individuals.
And just like any game, this game contains Rules and requires Practice for us to win it (refer to the ending of the article for an illustration of the inner-workings of the game — “The Financial Health Game”).
Imagine Society as a giant, it picks you up, carries you in complete silence towards something, and still in silence, It throws you in the middle of a field. Afterwards, It looks at you directly in the eye and says only one word before leaving: “Win”.
Now we find ourselves in the middle of a very complex maze, without knowing how it works nor having any training in dealing with mazes.
No wonder financial illiteracy and money problems are the norms.
Nevertheless, without further ado, let’s dive in!
What is this thing called Financial Health? Why is it so important? And how do we achieve it?
Let’s begin with the second question.
Why is Financial Health so important?
Financial Health is a right.
Everyone is entitled to be financially healthy.
Financial Health is as crucial as Physiological Health (Health of the mind and body) since we humans invented fiat money.
Even though Physiological Health has higher regard over Financial Health for us to enjoy life, it is partially dependent on Financial Health.
Financial Health is the tool that allows us to navigate and fulfil our human needs with less complexity. These needs were first discussed by Abraham Maslow, in 1930, where he states that human behaviour is fundamentally motivated by some key needs. These needs are fundamental for human fulfilment and satisfaction with one’s life, and we are constantly moved by them.
So the importance of Financial Health comes into play, every moment we are alive and are trying to live a good life. It serves as the tool, that allows us to climb Maslow’s Pyramid of Needs with far more ease and security (see picture above).
It is an invaluable piece of the puzzle when it comes to the topic of Quality of Life, whether individual or collective. Individually it means more health, more freedom and more peace of mind. Collectively, whether in a country or the world as a whole, it means better functioning people that may lead to a better functioning society which could lead to a better functioning planet.
Seems insane to think that Financial Health can lead to a better planet, right?!
Just think how you yourself, can’t think about anything else besides the problem at hand when you have an obstacle in front of you that is getting in the way of you achieving a specific important goal you have. Most people are not financially healthy which translates into: Most people have some sort of personal finances problem.
How can we ask people that have a financial dysfunction in life to contribute to things like sustainable consumption of the world’s resources and eco-friendly behaviour while they don’t know how to deal with the prolonged economic consequences of the Covid-19 Pandemic, for example?
Nor do they understand that Financial Health is a far better goal to have than chasing riches.
Because It helps you deal with the Now and the Future while enjoying life today!
Now, that we are beginning to understand why Financial Health is one of the most powerful concepts that we can implement in our lives, let’s further understand what it is and how we can achieve it.
What Financial Health is exactly and how does it work?
Financial Health functions just like Physiological Health, we must try to increase and maintain it every single day with our actions and behaviours. Just like “normal” health, financial health takes a long time to build, so a life commitment to it is a must. The earlier you start, the better your outcomes in life can be. This is how it works.
Just as Physiological Health is a result of the combination of behaviour around diet, exercise, rest, hygiene, social circles, genes and access to good medical care…Financial Health is the result of the combination of internal and external forces. Such as your financial decisions and abilities, overall behaviour, the state of the local and global economies, and access to good, unbiased financial services and advice.
Good Financial Health improves your ability to deal with your day-to-day finances, sustain financial shocks and be on track to achieve your financial goals.
Financial Health is composed of behaviour and actions around six key components:
1) Sources of Income:
Notice how it’s written “sources”?!
It’s your responsibility to not be dependent on just one source of income.
This might have made sense in the 19th century, it doesn’t today.
Having multiple sources of income increases your income and your stability.
2) Bank Accounts:
It is indeed true that for many life events and transactions you need to have a bank account. But this does not take away the fact, that you still have the power.
You have the power to decide which bank offers you the best package, to create an account, deposit your money, get a debit/credit card, be subject to the best fees in the market, and probably borrow money.
You can take the best value from banks when they trust you.
But you should always keep the following question in mind:
“What makes me trust them? And are they the best option amongst their peers?”
If you fall short on this relationship, you are jeopardising your ability to optimise your financial present & future.
3) Day-to-day Finances:
Here you must account for your needs, your wants and unpredictabilities without going into debt.
4) Short-Term Economics:
Note: In the field of Personal Finances, finances mean management of money for immediate results, and economics means management of money for future outcomes, whether voluntarily ou involuntarily.
Here we concern ourselves with goals and financial shocks that need to be dealt with within 3 months. The goals part is intuitive, it refers to goals that need to be achieved in the time-frame of 3 months. Regarding financial shocks it’s twofold:
4.1) The ability to deal with unexpected expenses that comprise up to 3 months worth of incomes, and;
4.2) The ability to withstand 3 months without incomes being generated, with no apparent alterations in your lifestyle.
5) Long-Term Economics:
Here we account for goals and financial shocks just as we did above, but the time-frame changed. It’s now focused onwards 3 months to a specific deadline defined by you. Not only that but we also account here for possible disability to earn incomes due to illness or injury, and retirement, if you’re in a profession you want/are demanded to retire from, such as a professional athlete.
So the financial shocks that should be accounted for in the long-run are:
5.1) Groundbreaking expenses, such as a car or house repairs after a disastrous accident;
5.2) Extended periods with decreased or no incomes, such as the people who were laid-off during the Covid-19 Pandemic;
5.3) Possible lifechanging events that leave you disabled, ridding you the possibility of earning income;
5.4) If you are in a profession that as a short-lived career lifespan, then creating a retirement fund makes sense, otherwise don’t retire. Just keep doing what you’re good at and enjoy.
6) Loans and Credit:
They may seem like the same thing, but they’re not.
Loans are effectively a sum of money that a lender provides to a borrower, with the promise to pay it back, in most cases with interest.
Credit is the trust the lender has in the borrower to pay back that said amount of money.
Different countries’ financial institutions deal with this trust in different ways. Some countries have a more simplified approach to trust, some have a more robust approach. This trust measuring system usually comes in the form of a credit score. So paying attention to this is crucial, it determines your ability to borrow.
Here we create sustainable ways of dealing with credit and figure out when to borrow and not to borrow.
How to achieve Financial Health & maintain it?
Now that we understand what Financial Health is and how it works, let’s dive in on how to achieve it.
In the general case, achieving Financial Health is more difficult than achieving Physiological Health. While the body & mind were formed in ways to optimise performance & well-being, there are no subconscious systems to maximise financial health because money is a manmade resource.
With Financial Health all our results are conscious, effortful & entirely our responsibility.
Here we not only have to be conscious about our current efforts, but also of our past efforts, to make comparisons and improvements, and future intentions.
Just thinking about it makes us tired.
Nevertheless, let’s get into the details of achieving Financial Health based on It’s six key components:
1) Sources of Income:
0) Before we even begin talking about Incomes, let’s first talk about Mindset, Attitude, Education & Planning.
It feels needless to say, but we will say it anyway:
You can only reach Financial Health if you actually believe you can live a better life going forward. Otherwise, there is no clear motive for you to pursue this goal.
Now, in regards to your attitude:
0.1) Be Realistic — Look at your current circumstances, compare them to the elements in this article and ask yourself: “Am I financially healthy?”. Whether you like the answer or not, accept it!
0.2) Take Responsibility — Most likely, you currently are not financially healthy (If you are, way to go!). Understand that your financial outcome is entirely your responsibility and take charge of it. You can influence it. You can improve it.
0.3) Be Patient — All things that matter take their time. This matters. So it will take its time. Endure. Then rejoice.
0.4) Delay Gratification — Many of the things required to achieve Financial Health (just as any other important goal), involve delaying gratification. Such as achieving a goal, or maintaining the habit of saving. Stay disciplined. Stay focused.
0.5) Educate Yourself — You are doing this right now. Keep up the good work! 😎 🤓 😁
0.6) Plan Next Steps — “Failing to plan, is planning to fail” — Benjamin Franklin. Make sure you always have clear, promptly achievable objectives and are on track to meet them. One step at a time.
1.1) Where everything starts and ends!
It’s all about how much income you can bring in, and how much income you can keep.
Decades ago, long before the Internet, having a steady job was the dream and the norm. Our new fast-paced society changed things. Jobs are not as steady as they were. People can no longer rely on a steady & satisfactory position in their current employer. So their view on work and incomes should change accordingly.
Jobs are increasingly being perceived as activities of vocation & joy with a potential positive impact in the world. The Japanese have a word for this combination of factors: Ikigai.
We agree with this philosophy. For multiple reasons. Mainly, because it’s shifting the mentality of people being mercenaries to missionaries. Which enhances their ultimate satisfaction in life. Also forces the idea that one individual cannot be tied down to a job just because of compensation. Which brings us to our point…
It is important whether you have found your Ikigai or not, to diversify your sources of income. Ideally, your Ikigai is keeping you afloat. But this is not the case for most people.
1.2) In order to extend your freedom and quality of life, besides changing jobs to one with better compensation, there are only 2 healthy ways to improve your income.
An example of an unhealthy way is to join a pyramid scheme and becoming a millionaire in 3 months.
Back to being serious… The two healthy ways are:
1.2.1) Leveraging monetary investments;
1.2.2) Leveraging current/future skills & hobbies.
1.2.1) Leveraging Monetary Investments:
This means you can take a certain amount of income you set aside (savings) and invest them in standard and/or non-standard financial assets with the objective of having positive returns: initial amount invested + additional capital.
Note that we used the word “objective”, not “hope”. Because gamblers have hope, investors have plans. They may not work sometimes, but the act of planning is much more profitable than just hoping you have good luck.
These assets contain varying degrees of risk and reward. It’s important to understand them before diving in. So which assets can you leverage here?
Standard Financial Assets (Securities):
1) Stocks — It’s a financial instrument which can be exchanged & negotiated, that represents ownership of a fraction of a corporation (Example: You buy a company’s stock at €100 and sell at €200 after a couple of months. You receive double of your investment.);
2) Bonds — It’s a fixed income instrument that represents a loan made by an investor to a borrower, government entity or a corporation. (Example: You loan €1000 to corporation MNO, with an interest of 5%, paid every year, for 10 years. Every year you receive €50 and at the end of the 10 years, you get your €1000 back. Your total returns are €1500.)
3) Cash Investments (Use these for saving purposes only.) — It’s a short-term obligation, that provides a return in the form of interest payments. It’s a very low-risk, low-reward investment. (Example: You lock up €10 000 for 3 years with a compounding interest rate of 3%, on a Certificate of Deposit. By the end you’ll have saved up €10 927,27.)
Non-Standard Financial Assets (Alternative Investments):
These are usually pursued to diversify a portfolio & manage risk. Mainly because they act independently from Standard Financial Assets.
It’s important to note that these assets most of the times are considerably less liquid than standard financial assets (it’s harder to value & sell them). They are also less accessible to retail investors (us, the people). For a multitude of reasons, such as high minimum investment and fee structures, less access to data on past performance, and in essence, not all non-standard assets are available for retail investors, for example, most of the Private Equity, Managed Futures and Hedge Funds.
1) Private Equity and or Venture Capital — In Private Equity, funds and individual investors put their money in later-stage private companies or engage in buyouts of a public company to make it private. Venture Capital is a form of Private Equity, that has gained a lot of popularity and maturity in the last decades. It focuses on startups and businesses that have long-term growth potential. (Example: You act as a business angel in a crowdfunding platform which allows you to earn considerable returns from your investment.)
2) Derivatives — It’s a financial instrument with its value reliant upon or derived from an underlying asset or group of assets. Here we find only 3 types of derivatives, with many variations amongst each type. In essence, there are options, swaps and futures/forward contracts. (Example: Contracting a warrant (a variation of an option) to enhance returns on stock ownership).
3) Hedge Funds — They are most of the times, aggressively managed and or make use of derivatives and leverage with the goal of maximising returns for their investors. It’s important to note that retail investors do not have access to this form of investing.
4) Managed Futures — They are an alternative to Hedge Funds, due to their structure and strategies. Used for portfolio diversification, and risk mitigation. Like Hedge Funds, these are not available to retail investors.
5) Collectable Items — These are a special kind of asset. Most of them only increase in value. The hard part is in valuing correctly and selling them. These are comprised of artworks, antiques, coins, stamps, sports’ cards, and fan-based items — such as Michael Jackson’s Thriller Jacket. (Example: Write “online auctions” on your browser’s search engine and see what you find. 😉)
6) Commodities — These are basic goods that are interchangeable with other goods of the same type. Here we find assets such as gold, silver, oil, crude oil, natural gas, beef, lumber, currencies, cryptocurrencies and others. They are bought by two groups: Buyers & Producers, and Speculators (us, retail investors). When speculating in commodities, it’s normal to buy & sell quickly, in a matter of minutes, hours or days (because their prices are quite volatile). Only in cases of portfolio diversification and hedging against inflation, is where investors hold these assets for a longer period of time. (Example: Buying gold in the exchange-market for €5000, it rises 25% after a few hours/days, then you sell it and cash in €6250.)
7) Real Estate — These are properties made up of land, and the buildings on it, as well as the natural resources of the land. There are 3 basic types of real estate: Residencial (houses, condominiums & etc.), Commercial (office, retail buildings & etc.) and Industrial (factories, mines & etc.). We can invest in real estate directly — buying land or property — or indirectly through REITs (Real Estate Investment Trusts) or MBS (Mortgage-Backed Securities). (Example: Buying a house, renting it and collecting said rent on a monthly basis.)
8) Peer-to-Peer Lending — This enables investors to lend money to borrowers, cut financial institutions as the middlemen, and potentially have returns (ROI) with the interest earned from the loans. Which is superior to interest made on conventional savings accounts and certificates of deposit (cash investments). (Example: You loan €2000 to an individual with a “risky” profile, on a P2P Lending Platform, and a 25% interest is set. Said individual pays you back, and you now have €2500.)
DISCLAIMER: It’s important to note that the examples used above are just that: examples. They are in no way a guarantee of success in your investing endeavours. Also it’s important to note that before you engage with investing, you need to assess your own risk profile, understand best practices to build a portfolio, and educate yourself further on the asset-classes & their variations that sparked your interest (we will be touching on these topics on future articles ;) ).
1.2.2) Leveraging current/future skills & hobbies:
As you know, your income is directly correlated to your skillset, the opportunities you create & what your environment offers. In your career, your income increases with the number of skills you use to provide better results to the organisation, be it through a raise, bonus, more clients, upselling or etc.
So, the idea of always investing in yourself should, if it’s not already, start getting ingrained in your mind. As Warren Buffett says “Investing in yourself will be the best investment you make in your life.”
Not only improves the probability of a raise in your day job but also allows you to pick up skills you previously didn’t have and can make for a side hustle which, of course, brings more money to your pocket.
Look also into your hobbies… Do you like playing video games? There are platforms that can help you make money from it (what a world we live in).
Do you enjoy having fun with the guys, making homemade music or doing make-up? Stream it! You can bank a considerable amount of money, such as these people.
Whatever way you choose to diversify your sources of income, do it.
Start today!
Starting today means only that you take this concept seriously and start thinking of ways to make it happen.
In the world we live in, makes little sense to have income be an obstacle to a better quality of life.
1.3) With income comes what?
Taxes!
It’s important to make your plans according to how much income you keep after paying all of your taxes regarding the country you live in.
NOTE: We will touch with more depth on each of the topics laid down here in the “Sources of Income” & of the following Financial Health Components, in future articles.
2) Bank Accounts:
As said previously, you hold the power.
These institutions want your money, so they can conduct business. Choose them wisely.
Search for bank accounts with low to none monthly maintenance fees & ATM fees on your debit and credit cards. Do pay attention to their overdraft policy if they have one, and go with the most lenient one. Finally, pay attention to their interest rates on their savings accounts, money market accounts and certificates of deposit.
You can open an account in different types of institutions and different types of bank accounts.
In essence, consumers can look into brick-and-mortar banks, which are for-profit organisations that have a physical location where people can go to conduct business (The ones you, your parents and your grandparents are accustomed to).
People can look into becoming customers/members of a credit union, a not-for-profit organisation, that even though comparing to retail banks may have fewer brick-and-mortar locations, and are much less widespread in a global basis, their ATM reach sometimes is the same inside a given region or country. Because of their absence to generate profits, they outperform common retail banks in having lower fees and account minimums, higher rates on savings, and lower borrowing rates for their members (customers).
To conclude, people can look into neobanks which are too, for-profit organisations, but with no physical location to conduct business. Everything runs online through websites and apps (marketed as the future of banking).
On brick-and-mortar banks and credit unions, you can access 6 types of bank accounts (within the same bank you may find multiple variations of the same type of bank account):
2.1) Checking Accounts:
They are used for day-to-day banking, including depositing your paycheck, withdrawing cash and paying bills. They offer multiple ways of accessing your money — through a debit card, ATMs and personal checks, with no limitations on the monthly transactions you can make.
2.2) Savings Accounts:
These type of accounts allow you to store your money in a safe place and have quick access to the funds in the event of an unexpected expense or situation, such a medical expense or losing your job. Sometimes savings account do present a limitation on monthly transactions you can perform.
It’s important to inform yourself whether your bank has this account insured for possible losses if the bank becomes insolvent, and for how much. For example, Portugal’s bank accounts are insured by the “Fundo de Garantia de Depósitos” to no more than €100 000,00.
2.3) Money Market Accounts:
These accounts combine features of both checking & savings accounts. Offering limited check-writing privileges and collect interest at higher rates than savings or checking accounts, making them useful for both short and long-term needs.
2.4) Certificates of Deposit:
These accounts function as savings accounts but they hold your money for a fixed, pre-defined period of time. This period can go from one month to five years. It usually allows you to earn more interest than any of the accounts listed above, but you’ll have to commit to keeping your money in the CD for the full length of the term, otherwise, you will have to pay an early withdrawal penalty.
2.5) Retirement Accounts:
Retirement… Such a flawed concept.
We do not agree with the concept of retirement because we believe that all human beings must remain active, engaging in things they enjoy and are valuable to people other than themselves. Thus mentioning Ikigai earlier.
Nevertheless, if you find yourself in a career that’s exhausting, with no other way to go but out, then make sure you have a substitute for your job-related income. Even if you live in a country like Portugal, where you receive a retirement pension from the government when you meet the requirements, setting a retirement account is a smart move.
These accounts are tax-advantaged investing tools that individuals use to store money and accumulate interest, for their retirement purposes. One rule of thumb is to save a minimum of 12x your annual pre-retirement salary.
2.6) Brokerage accounts:
Remember when we talked about “Leveraging Monetary Investment”?!
Well, you are going to need a broker to deal with most of the asset-classes mentioned.
These accounts are arrangements between investors (us) and a licensed brokerage firm, where we deposit the money intended for investing, and they perform trades on our behalf. Even though brokers execute the orders, the assets belong to the investors. When capital gains (returns on investment) are incurred they must be claimed as taxable income. Implementing a Buy-and-Hold Strategy (keep assets for more than 12 months) provides you with tax benefits.
NOTE: Even though we are presenting the brokerage account under the “Bank Accounts” component and most banks have these accounts, most times it’s a better option to go with a licensed brokerage firm for more advantages to the investor.
3) Day-to-day Finances:
It has come the time to talk about the under & overestimated day-to-day finances.
They are underestimated and overestimated for the same reason: most people allocate a lot of their income to monthly expenses.
If you can read this article, process the information without complications, have a roof over your head, clothes on your back, food in your kitchen, access to the internet, on a smart device you own then you are better off than approximately 50% of the people alive today. They are allowed to spend everything they have on survival, you are not!
You should do better!
If you aren’t already, you should start maximising your money’s utility today!
Let’s get into some crucial details of this behaviour:
3.1) Overestimation of Needs:
When introducing the “Day-to-day Finances” component we said that it is about accounting for needs, wants and unpredictabilities. What happens is that most people have a hard time differentiating Wants from Needs.
Take Gustav, for example, a mid-to-late 20s man, who recently got promoted at work, needs to buy a car. Instead of going with an affordable, well-kept, second hand Ford Fiesta 2012, with 1.6L engine, with economic fuel consumption, he wants to show off that he “banks big bucks”. Gustav goes to the car dealership and leases a magnificent brilliant blue metallic Mercedes Benz AMG C63 Sedan, 4.0L Twin-Turbo V8 engine, 503 horsepower, that goes 0–100km/h in 3.8 seconds, with 19-inch wheels and Nappa leather upholstery. The downside is that now he lives paycheck to paycheck, with a substantial debt load.
With personal finances, if you fake it you’ll never make it!
Gustav suffers from a little very common thing called “lifestyle inflation”. Which simply translates to the tendency that many people have of spending more because they make more.
Gustav has also shown us that it is very easy to transform an actual need, into a wildly unnecessary want. Satisfying our wants is important, that’s why we account for them. Such wants may include a romantic dinner, night out with the gang, watching your sports team play live & etc.
But we should always question ourselves about needs & wants we can meet now and ones we have to plan & save for.
3.2) Underestimation of Budgeting:
We said that everything starts and ends with Incomes…
Well, budgeting is everything in between!
You do indeed need to budget for your monthly expenses which include your immediate needs and wants. But one must also leave wiggle room for small unpredictabilities, such as replacing your laptop’s charger that goes bust, for example.
One must also realise that needs, wants and unpredictabilities are not just immediate. You also need to save, minimum on a monthly basis, to reach your future goals, that may include needs and wants, which influence your future satisfaction with life.
In the case of having debt, make annihilating that debt your top priority. Debts are especially bad because they contain compounding interest. Keep in mind this wonderful quote from Albert Einstein: “compounding interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t pay it.”
Some good rules of thumb to remember:
Be mindful of your priorities. Budget for today & tomorrow. Pay yourself first. Keep track of your balances. Keep track of your expenses. Match expenses to budgets. Know your credit history. Annihilate existing debt. Aim to underspend on less important budgets. Don’t incur debt for consumption. Make all of this a part of your financial regimen and follow it.
Budgeting effectively takes significant time and effort. But it’s worth it!
3.3) Overestimation of Luck:
Some people overestimate the amount of luck they will have in their lives.
They falsely believe they have everything under check and that tomorrow always holds a sunny, smiling welcome.
Thus they don’t budget for unpredictabilities and believe in get-rich-quick schemes, such as multi-level marketing companies or winning the lottery.
So when the world is hit with a large global recession such as what it’s facing with the economic consequences of the Covid-19 Pandemic now in 2020, and millions of people all over the globe are being laid off work without the proper income savings (minimum of 3 months worth of income to a comfortable 12 months of income) s**t gets real!
This exaggeration of luck also plays a key role in people believing they can get rich quickly and reap the benefits eternally.
It’s more likely that you’ll survive a plane crash than it is that you’ll win the lottery. Nevertheless, on aggregate, people still spend hundreds of billions of Euros on games of chance each year.
Some people make it a daily habit. This simply is poor distribution of your funds. And often, even if you do win, because you lack financial health, you’ll get back to being broke in no time.
The answer?
Plan & budget for the unexpected. Such as a substantial medical emergency, losing one of your main sources of income or all of them, invalidation that cripples the ability to earn incomes (a logical use for the retirement account) and all other major financial shocks.
3.4) Underestimation of Environment:
If we were to bet, we would say that this part of the Day-to-Day Finances is where people show less awareness.
Your environment heavily influences your behaviour and habits!
We are social beings. It’s a condition we cannot escape from even if we wanted to. So the people we have around us and their behaviour with money have a direct effect on our own behaviour with money.
This effect initiates the moment we start gaining consciousness of the world around us. If we were born into a less fortunate financial scenario and see our immediate family members handle money poorly, the probability of us growing up to be adults who handle money poorly is higher than if the opposite was the case.
This extends to your significant other and friends.
What are your individual and collective habits?
Do you dine out every Thursday?! Do you go out for drinks every Friday?! Go to some Shisha Bar every Saturday?! Meet every evening after work for some 8 Ball Pool?!
Being with the people you love and who love you back is great! This does not mean that every time you’re together money has to be spent. Sometimes the best experiences cost €0. Get creative!
In your group of friends, does everyone smoke? Maybe you should distant yourself if you want to save more money and improve your health.
Do you have a Gustav in your group of friends? Do you feel the Need-To-Keep-Up (NTKU)?
Don’t!
Lifestyle inflation is taught to us, it’s not inherent.
Keep yourself aware and realise that in moments like this, you should practice Gratitude. For all of the big & small blessings you have. And just stay focused on living your life. You will eventually do & get what you want in a financially healthy way.
4) Short-Term Economics:
An individual’s economic situation is crucial for their ability to become financially healthy or be able to build wealth.
As we said when we introduced the Short-Term Economics component, in Personal Finances, Economics relates to a person’s ability to manage their future financial outcomes, whether voluntarily or involuntarily.
In the short-term, we are only focused on being able to handle 3 things:
4.1) Achieve personal goals that have a lifespan of up to 3 months;
4.2) Create an Emergency Fund that, at first, can withstand unexpected expenses up to 3 months of Income in monetary value;
4.3) Create a Lifeline Fund that, at first, can withstand a complete loss of income amounting to 3 months worth of Averaged Incomes.
4.1) Short-Term Personal Goals:
Saving money only becomes a habit when we attach an objective to it. The most motivating objectives we have are ones that allow us to achieve higher levels of satisfaction with our lives. They are experienced-based. Such as travelling, going to a concert, doing fun & out-of-the-ordinary activities with your friends, and all those other things we daydream about.
Most great experiences are relatively cheap. If we promptly don’t have the money to do them, we can surely save and achieve the goal under 3 months. These goals go here!
4.2) Creating an Emergency Fund:
This goal is less exciting, but it’s just as important!
Living is a risky activity.
Being unprepared for considerable unexpected expenses is not an ideal circumstance to be in. Because if something indeed happens, and we are unprepared, we can have our quality of life decreased in very unpleasant ways for extended periods of time.
This pain fairly outweighs the pain of saving for such a boring goal. It’s smart to avoid it!
To speed up the process of achieving the goal, we may leverage the wonderful powers of compounding interest. One might look into a high-yield savings account (variation of a basic savings account), or investing in a relatively low-risk asset class.
4.3) Creating a Lifeline Fund:
The reason why we create two funds to hedge the risk of a possible decrease in quality of life is simple.
Contracting a high medical expense, for example, and temporarily losing your sources of incomes are not mutually exclusive events. They can happen at the same time. In the case, they both occur, you have the ability to respond to both without stressing.
Again, to be financially healthy is to live your life without financial disfunction. So nothing, relating to money, gets in between you and your happiness!
It’s important to note that temporarily losing the ability to generate income can happen to everyone. We have this unrealistic tendency to think that it only happens to our neighbours. We must fight against this bias. The best way is to create a Lifeline Fund.
Here too, we can leverage compounding interest on a Certificate of Deposit, for example, setting the lockdown period to something manageable, such as repeated periods of 6 months.
5) Long-Term Economics:
Everything that was mentioned in the Short-Term Economics component is still relevant here. The only difference is that the timeframes changed.
Now the 3-months objective passes to a 12-months objective.
You set goals you want to achieve in a year.
You save money in your Emergency Fund that’s equivalent to a year’s averaged incomes’ amount.
And you do the same in the Lifeline Fund.
To achieve 2 years worth of averaged incomes on both funds in savings is incredibly difficult and it takes its time! But it is one of the most important things you can do with your money.
The psychological benefits of having this are tremendous!
On this state, very few things can rock your financial boat.
Besides the above mentioned, here is where we deal with Insurance! Insurance, in essence, helps us deal with many types of financial shocks.
Insurance is a contract, represented by a policy, in which an individual receives financial protection or reimbursement against losses, from an insurance company.
There are 3 essential concepts everyone must be familiar with when shopping for a policy:
* Premium — This is the price you pay for the policy, typically expressed as a monthly cost.
* Policy Limit — This is the maximum amount the insurance company will pay under a policy for a covered loss.
* Deductible — This is a specific amount the policyholder (us, the people) pay before the insurance company pays a claim.
There is a multitude of different types of insurance policies available. Here we’ll introduce you to the most commonly incurred by individuals.
Keep in mind that, Premiums and Deductibles are inversely proportionate. Higher deductibles mean lower premiums and vice-versa.
5.1) Health Insurance — Is a type of insurance coverage that pays for medical, surgical, and sometimes dental expenses incurred by an individual. Health insurance can reimburse the insured person for expenses absorbed from illness or injury, or pay the care provider directly.
This is a highly recommended type of insurance people should have.
When shopping for plans, individuals must weight the benefits of lower monthly costs against the potential risk of large out-of-pocket expenses in the case of a major illness or accident.
5.2) Life Insurance — They provide financial support to surviving dependents or other beneficiaries after the death of an insured individual. This is not for everyone.
But, at the moment you start thinking of creating a family you should keep this in mind. Such as a young couple who are having a baby, or own property together. This type of policy can prove itself quite beneficial.
5.3) Disability Insurance — Is a type of insurance that will provide income in the event a worker is unable to perform their work and earn money due to a disability. There are many types of organisations that provide different types of disability insurance. Each organisation and disability type have specific rules as to what constitutes a disability and how a person might qualify to receive the disability benefit.
Disability Insurance comes in many forms and can be obtained through a wide range of providers for a wide range of prices. The price of a disability insurance policy depends on the length of the elimination period (time the insured person has to wait to start receiving the benefits), the benefit period (how long a person is able to receive the disability benefit), and how strict the definition of disability is under the policy. Each policy can have its own definition of what qualifies as “disabled”, so it’s important to understand these rules before buying a policy.
The two most common definitions are “own occupation”, where a person is considered disabled if they are no longer able to perform the occupation they had prior to becoming disabled. And “any occupation”, where a person is considered disabled if they are unable to perform any job at all.
5.4) Property Insurance — This is a broad term for a series of policies that provide either property protection coverage or liability coverage for property owners or renters. Property insurance provides financial reimbursement to the owner or renter of a structure and it’s contents in case there is damage or theft, and to a person other than the owner or renter if that person is insured on the property.
Property Insurance includes a number of policies, such as the very necessary Homeowners Insurance & Renters Insurance, Flood Insurance, Earthquake Insurance, Sewer & Drain Backup Insurance, and others.
The three types of Property Insurance coverage include Replacement Costs (here depreciation doesn’t quick in, you can repair or rebuild your home up to the original value), Actual Value Cash (here depreciation quicks in, and you get reimbursed on what your property — home and belongings — are worth today, not what you paid for it), and Extended Replacement Costs (the most comprehensive coverage, which pays for whatever it costs to repair or rebuild your home with a ceiling of 125% the value you paid).
5.5) Car Insurance — Accidents happen, and when they do, insurance is what keeps our finances safe and sound. Whether an auto collision is your fault or not, your car insurance should help you. How much it helps, however, is up to you and this is determined by the combination of options that comprise your insurance policy. Pay attention to conditions regarding Personal Injury and Personal Liability, Uninsured Drivers, Major Accidents, Getting Stranded and as mentioned previously, the relation between Premiums and Deductibles, when choosing your Car Insurance Coverage.
5.6) Pet Insurance — This is like health insurance for humans, only for your pet. It’s an insurance policy bought by a pet-owner which helps lessen the overall costs of expensive veterinary bills.
With all of the above-mentioned Insurance types and others, selecting the right coverage is key. But also selecting the right insurance company, to maximise the probability that your claims will be paid. You don’t want companies that will flack on you, and not meet the agreement when you need them the most.
Be an educated buyer, do the proper research, compare quotes, and create a package that suits both your coverage needs and your budget!
6) Credit & Loans:
The last component in Financial Health.
Some people believe that they should avoid all loans at all costs. This is hyperbole.
Loans can be quite powerful in a person’s life.
Whether to build a credit score and get benefits, reap credit card rewards, buy a home, go to college, finance a business and other viable motives.
Firstly, it’s important to remember that credit is the trust the lender has on us and this affects the type of loans we can get.
Maintaining oneself aware of our credit history is the first step, and most countries all over the world can provide you with this information for free if you ask at the appropriate authorities.
Then we should understand what type of loan-structures exist.
We have secured and unsecured loans. And we also have revolving and term loans.
6.1) Loan Structures:
Loans can be secured and unsecured. This only translates to one thing. Does the loan involve collateral?
Mortgages and car loans are secured loans because the asset itself serves as collateral in case of a default.
Credit cards are an example of unsecured loans because they provide no guarantee for the lenders that there will be a payment. Unsecured loans usually have higher interest (APR — Annual Percentage Rate) than secured loans, which translate into more money to pay back and a larger period of time paying down the loan. The APR is the most important number in contracting loans. Be wary of it.
Credit cards also qualify as revolving loans, because they can be spent, repaid, and spent again.
Mortgages or car loans are term loans because they are paid off in equal monthly instalments over a set period of time.
6.2) Incurring Loans:
Mindfulness must be practised when deciding to take out a loan.
An individual should only take a loan if it represents investing in a substantial financial or psychological asset (things that provide mental security).
Such as student loans, mortgages, car loans (for the first car), and personal business financing loans.
Loans for shopping, travelling and things of the sort are to be strictly avoided!
Loans for consumption create the habit of spending more than you have. Which is one of the main killers of Financial Health!
Our default setting as a Society is to consume, consume and consume. Allowing for this unhealthy habit to crip up under these circumstances is like digging your own grave.
6.3) Dealing with Credit:
There are a few ways of dealing with Credit to improve your relationship with financial institutions. Here we’ll just mention one.
Whether you live in a country with robust credit scoring systems or not, it’s a smart move to get a credit card, with a ceiling below your monthly income and near your Needs’ budget. This way, depending on the card you choose, you can reap credit card rewards such as cashback, loyalty points, air miles, rebates, discounts and premium rewards, by transacting your necessities with the credit card and paying in full with your debit card before interest quicks in.
Here you gain the rewards and keep building your credit score which will allow you to reap even more benefits when dealing with financial institutions.
We have finally reached the end!
Three claps for us! 👏👏👏
This was definitely extensive but we sincerely believe it was necessary.
Necessary to clarify the why the what and the how in only one go.
So when you read it, it sinks a little bit deeper.
We hope you leave this article a little bit more knowledgeable, more aware and excited to start working on your financial health the right way if you haven’t started already.
Before we go, we want to share what we promised at the beginning of the article: The Financial Health Game Illustration.
Playing the Money Game:
1) Define personal objective (2 possible options);
2) Generate & increase aptitude to play the game;
3) Play the game;
4) Reach personal objective & maintain position!
We would like to express to you that we have created Utopia-On with the sole purpose of helping you become Financially Healthy (end goal or basis to create Wealth) and live a life with a little bit more quality. With minimum effort on your part. Make Personal Finances be what they are supposed to be: A breeze.
The Utopian Finance app is the best budgeting app you could have because it actually works.
It differentiates itself by doing what you expect it to do. Not to just be a spreadsheet in your pocket.
It feels like you’re a child again where you don’t have to think about money because you know it’s being taken good care of. And this is what everyone wants from a budgeting app.
An app that allows you to live!
Visit www.utopia-on.com and JOIN OUR BETA GROUP so when we release the app soon, you’re the first to know and start playing the money game the right way!
We want to conclude by stating the obvious and ask a question.
You won’t die if you don’t focus the right amount of effort to become Financially Healthy.
But you won’t live either. You’ll just survive.
The question is:
Is surviving all you want to do in this life?
