Sound Financial Health is attainable than one might imagine. Image courtesy — Google

3 Ways To Plan Your Financial Health

In today’s day and age, we read a lot about personal finance, like making money, saving, investing, spending, etc. Some articles are prescriptive in approach, while some are from writers’ own experiences — which to me is a treasure. Some of the reads are more of a food for thought to the readers’ mind to apply to their own situation, and triage the best way forward. No matter how one slices it, they are all great, and worth reading.

This article here, is my effort to shine light on a framework, or strategy — if you will — to warp our financial choices and behaviors into a simple 3-pronged affair. My professional experience in banking, insurance, credit and lending have taught me how customers are viewed by financial institutions (FI) in terms of ‘good customer behaviors’ & ‘financial health’. Personally, over the last decade, I have focused on my own financial health based on these attributes, and have reaped sustainable rewards. Based on those learnings, and experiences, I want to share these 3 areas an individual must necessarily focus on to gain financial health and well-being.

The 3-step framework to categorize your money spending choices, or behaviors are:

1. How you spend everyday, or month
2. How you spend for the future
3. How you spend for a financial event (planned, or unplanned)

Monitor where you spend, and ask ‘why’ you need to spend there. Image courtesy — Google

1. How you spend everyday, or month: this area of focus that takes into account the ‘consistency’ of a person’s spending, and one’s wisdom to spend on everyday things. Typically, spends that come in this bucket are everything apart from investing dollars, and savings’ dollars. I liken this behavior to going for a workout regularly. Much like our physical health, our financial health has to be practiced day-in and day-out, 24x7. Our FICO scores are a good indicator of this behavior (if one would care to venture deeper into one’s credit report), while I’d personally look at other indicators in conjunction to ascertain the ‘consistency’ aspect of a consumer’s financial health. However, one does not have to go check credit reports and scores to understand their own consistency of spend. A good indicator of your spend is, how many streaming services you got, magazine subs, on-demand subs, gym subs, shopping subs, trips you make to the grocery store, gas station, pages in your credit card bills, and a lot more (you get my drift…). Add all these to rent, insurance, utils., mobile bills that one has to have as bare minimum, these days.

Numerous start-ups today are vying to take a piece out of consumers’ share of wallet in the form of subscriptions (a.k.a. subs) , while others are monitoring that behavior to understand what else can be sold to them. Our demand for consumption fuels this behavior. If unchecked, it can rapidly balloon to an unwieldy number that pinches the other aspects of financial well-being. So this is a slippery slope one must tread very carefully.

Tips to improve this behavior:

1. Watch where you spend, and ask ‘why you need it’. Subscriptions are good, but they should add incremental value. For e.g. having a netflix sub is good, having netflix, hulu, prime video, and cable (if at all) is an overkill
2. Reconcile your credit/debit card bill each month, if the length of the bill and line items make your eyes pop, you know what you have to do

Don’t lose sight of the old ‘you’. Invest for the long term. Image courtesy — Google

2. How you spend for the future: I once read a nice quote that went like,

“Retirement is wonderful if you have two essentials — much to live on, and much to live for.” — Unknown

We all look to a moment, when we hang-up our cleats and call it a day. We do it to spend a relaxed life, with our close, & loved ones, without being a financial drag on them. It’s a sad reality for many people around us, that there isn’t much saved for retirement that will give a steady income via interest, or plain simple savings to dip into 20y-30y from now. We all live so engrossed into the day-to-day living that the long term goal to save for the future ‘us’, is often lost.

The second aspect of sound financial health is behavior linked to one-day-in-future goals. I tie this behavior to one’s financial ‘longevity’. As average life-span keeps ticking up, our retirement nest-egg needs to exponentially grow also to keep up with a certain minimum life-style that one wants to live well into retirement.

Sadly, this aspect of financial health is woefully ignored by us millennials and Gen-Zs, although Gen-Zs do have time to catch-up, we don’t. While there are numerous ways to save-up for a retirement, the critical parameters are assets one invests in, and the time horizon. As I alluded to earlier, there are plenty of articles out there to guide on what, and when to invest in. My point is to start now!

Goal-based financial behavior is hard to practice by way of human tendency, but modern saving & investing tools make a good starting point. Regular investment into financial market instruments like ETFs, fundamentally strong company stocks, are a good start. Financial markets are roaring to new highs, and more money is ploughed into them as more people join workforces all over the world at one end, & wealth is transferred from one generation to next, on another. This is a sign that the markets will only go higher from here, of course corrections are a part of that journey. While I am not recommending what to invest in, that is the job of a financial advisor, I would like to point-out that one has to be invested in the market.

Another aspect of long-term goal-oriented behavior is home ownership. While it is dreadful to think of substantial, fixed, monthly out-flows— as mortgage payment— from one’s take-home salary, one has to see the fine line of what home ownership brings in the long-term. Simply put — your home is an asset that you invest in over time, while using it functionally to keep a roof over your head. Psychologically, it has its pros too, which we will not get into here.

While renting pays someone else’s mortgage, you pay your own. I am aware of rent vs. buy arguments, and they are fair too. However, in the context of financial longevity, buying makes sense. Needless to say, while renting has an infinite presence on your financial banking statement, buying will show itself as a line-item for the next 30-years only — that’s it.

Going back to my working-out/gym metaphor, I liken this piece to eating healthy, and watching our calories, etc. Our body needs nutrition while we go to workout each day, so eating good organic stuff (for e.g.), or vegan diet, etc. keeps us investing functionally on food so that our body lasts longer in great health.

Tips to improve this behavior:

1. once you have a buffer — rainy day fund — stashed, speak to friends (who know what they are talking about), or a financial advisor on investing your money
2. start saving for a home, stash away for buying a place. Earmark it! This is not your rainy day fund, instead for your crib. I know some folks who invested their home-fund in stocks stable dividend paying companies, and cashed out when it was time to buy. That is a sound play as well

Preparing for the unexpected is offensive defense, and the best way to be financially stress-free. Image courtesy — Google

3. How you spend for a financial event (planned, or unplanned): the last bit here, we tend to lose sight easily. It’s an equivalent of a hole we don't see ‘cos we are too damn busy looking to the sky dreaming big, or busy running looking ahead. It is a financial hole, and each one of us has been in one at some point in our life. It’s the only aspect of our behavior that we react defensively. almost all times. The behavior to handle a financial disruption, determines financial ‘resilience’. It is our ability to cope with financial stress in the event we get thrust into one, or voluntarily walk into. To put into perspective, losing a job, sudden expenses like car transmission breakdown, medical emergencies, qualify as former, while taking an unplanned vacation with family or friends, paying for a siblings’ tuition, throwing a graduation party, paying a relative’s emergency medical bills count as latter. I see a lot of articles that are averse to saving, but I’d like to point out those articles are assuming you have this base covered. It’s the single important reason why individuals get in financial trouble long-term, because they can’t get themselves out of a financial hole they got themselves in, short-term.

A good measure of financial resilience is your liquid savings. It’s a must to have a baseline amount in your savings account that is not earmarked for market, or acts as a down-payment to your home, or car, etc. It is a savings, for the future that is not for a retirement, but as an insurance to protect your retirement from going off-track. It’s the logical-zero mark. Dropping savings below this point is a sign that you are overspending in the negative, or unprepared for a financial event. An event that you have no control over, and wont knock before it arrives. This rainy-day savings to counter the event can be a measure best judged by you, based on your rent, and payment obligations you must meet. Netflix, Instacart, and Prime subscriptions don’t count in that list, by the way. There are numerous articles out there that explain what is a good measure to have in liquid savings.

This aspect of financial behavior crisscrosses with the other two above, and to any lender, or even a person, is a good sign that shows financial prudence. This behavior helps reign in spending from the daily bucket, while keeping eyes on future goals.

Back to my work-out metaphor, well, there is none! If you fall sick and can’t go for a workout, you need to recuperate and the body will be resilient based on how regular you were, and how well you treated it in terms of a good diet.

Tips to improve this behavior:

1. know your financial blind-sides, not everything is planned especially events that you don’t want to experience. But they do make a sound once in a while. For e.g. If you have a car that’s on the edge of a breakdown, get rid of it, or keep car repair money in the account. A shoulder pinch when working out, can be an expensive affair if not attended to early on.
2. pay your credit card bills in-full, because of the high interest rates they charge on balances going into next month/billing cycle. Having a credit card is not bad, you should have them because it reflects well on your credit utilization in the credit report, but using it to a point where it pinches your saving ability is a financial suicide
3. take calculated risks. It’s OK to invest on a stock that goes down, but doing so on margin and savings is a bad call. Your financial resilience depends on how long you can take the financial pain, so it’s important to know your risk appetite, and pain threshold. Never exceed it.

Wishing you a great Financial Health!

Note: (a) the ideas here simply my thoughts put together from my entrepreneurial experience, my past work in finance, meeting a lot of people from various walks of life, and reading wide-ranging research on financial health, financial planning, personal finance, and plain old common-sense, (b) please conduct informed research for any investments you do, after reading this, and all related articles. I strongly suggest speaking to financial advisors, prior to making money moves especially when there is a potential loss risk involved.