Most people can only guess where they stand in terms of their financial health most of the time. We are not talking about people who ‘don’t care’ here; we are talking about perfectly reasonable and interested people. People who when feeling poorly take their body temperature, measure their pulse, have blood pressure monitors and use them, and hop on the scales far too often. Even if you don’t go to that extreme when feeling off, odds are you take better care of your health than your finances.
What I am asking is if we are smart enough to take all these measurements when it is about our physical health why do we fail to monitor our financial health?
It seems to me that we fail to take the measurements describing our financial health for three main reasons:
a) we can’t decide what to measure
b) measurements don’t make sense
c) we are anxious about what we may need to do to get financially healthy
In this post, I’ll address all of these issues. If we take these initial steps on the journey to financial health, we will see a dramatic and positive change in our finances and our lives overall.
Improving Your Financial Health
The good news is that in order to overcome the first issue most people face in terms of their financial health all you need to do is to start tracking five numbers. These are:
- Assets and Liabilities
- Net Worth
Working out one’s income should not be a problem. However, there is the matter of individual income, family income and company income; the difference between pre-tax income and after tax income; and the importance of yearly, monthly, daily and hourly income.
So, to keep things simple, we can say that income is all money that, figuratively speaking, goes in you or your family’s pocket. This includes your paycheck, any interest and dividends you earn as well as any money you earn on the side.
You don’t need to go crazy tracking this number since most of it will be on your tax return. The only missing number might be some cash you earned on the side, but for the most part, what is on your tax return is good enough.
In order to track your income, simply create a spreadsheet and in one column list the year and in the next, list your income. The following year, do the same only in the row below it.
As the years pass and you file your taxes, simply update the spreadsheet. The reason you track this number is to see your income increase. That should be the goal. If you find that your income is not increasing, you need to take steps to start having it increase. This can include any of the following:
- Ask for a raise
- Switch jobs
- Save more (you’ll increase the amount of interest you earn)
- Invest more (you’ll earn more dividends this way)
On the other side of the equation is spending. Spending (or expenditure) is everything that leaves your pocket. Spending fits under three categories: