This guide offers a roadmap to financial health, covering key steps from net worth evaluation and debt management to understanding budgeting, emergency funds, and retirement planning.
Introduction
Financial health is a crucial component of a stable and secure life. Yet, many of us find ourselves navigating the complex world of money without a clear path. This guide aims to help you navigate the complexities of personal finance for a stable and secure future
Net Worth Assessment
A key first step is getting a better understanding of your financial situation by conducting a net worth assessment. Your net worth serves as an indicator of your financial health. Net worth is calculated by subtracting your liabilities from your assets.
Liabilities are usually a debt or something you owe i.e. mortgages, car payments, student loans, credit card debt.
Assets, on the other hand, encompass any valuable property or resource you own i.e. cash, investments, real estate.
To determine your net worth, you’ll need to add up all your liabilities and subtract this from the total value of your assets.
Tracking changes in your net worth over time will provide you with valuable insights into your financial progress and areas for improvement.
Debt Management
Now that you know about all your liabilities, it’s time to do something about them. You want to minimize your liabilities (debts) as much as possible. You’ve already identified and listed all your liabilities, now it’s time to come up with strategies to manage them. Some helpful strategies are the snowball method (where you focus most of your efforts on one debt at a time, starting with your smallest debts) or avalanche method (where you start by focusing on your largest debt) to pay it down. Maintaining a good credit score is equally vital. Ultimately, understanding and managing debt is essential for maintaining financial health, it’s very important to stay on top of your debts.
Budgeting and Spending Habits
Creating a budget is a fundamental step in financial management. To get started, you’ll first need to know your total income and all your expenses. Once you have these numbers, you’ll need to determine how to distribute the income that isn’t going towards your expenses. You may also find it helpful to choose a budgeting strategy. You could try one of the following strategies:
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60-10-10-10-10. 60% of your after-tax income to housing and other needs like groceries and utilities, 10% on retirement savings, 10% on long-term savings or debt reduction, 10% on short-term savings, and 10% for fun.
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30-30-30-10. 30% of your after-tax income to housing, 30% on needs (groceries, utilities etc.), 30% on savings goals, 10% to wants.
The key is to know how much you’re allocating to your housing, personal needs, short-term savings, long-term savings, and wants. Particularly knowing how much you can spend on things for fun each week will help you stay on top of trivial spending.
Tip: Track your spending every month and review to ensure you’re staying on top your goals. If you’re consistently missing your savings goals, you may need to choose a different strategy.
Emergency Fund
Life is unpredictable, and an emergency fund acts as a financial safety net. While everyone has unique needs and expenses when it comes to building an emergency fund, it is generally recommended that you have 3-6 months of expenses saved up. This can protect you from having to draw on long-term savings in the event you are unable to work for several months.
Remember, you don’t have to get it all sorted and saved at once. You can start with a little bit and grow this emergency fund over time. Saving a little every week will go a long way.
Tip: Open a separate account for your emergency fund so that you can track how much you have saved and so that you don’t dip into your funds by accident.
Savings
Don’t forget to distinguish between short-term and long-term savings. Keeping all your savings in one pot or saving without deciding which savings are long-term vs. short-term can mean that you’ll miss your saving goals, particularly if you’re constantly dipping into long-term savings for short-term goals.
Long-term savings are typically anything that you won’t be needing for 5+ years. This could be savings for a property or your retirement.
Short-term savings are anything you’ll be needing in 5 years or less. This could include saving for a new vehicle, a trip, or home improvements.
Retirement Planning
Long-term savings and investments go hand-in-hand with your retirement planning. To get started, you’ll need to assess your retirement savings goals. If you’re not sure how much you’ll need, check out our guide on calculating how much you’ll need for retirement.
Once you have a goal, you’ll need a strategy to get there. You’ll need to determine how much you need to save every week to reach your goal. Then you’ll want to explore your investment options: investing your savings can help you reach your goals faster. After that, regularly review your retirement plan to ensure it aligns with your evolving financial situation.
One key part of retirement planning is reviewing your KiwiSaver. To make sure your KiwiSaver aligns with your financial goals, have a look at your fund selection. Does it match your investment horizon and risk tolerance? Do you need to change your contribution rates?
If you need help reviewing your KiwiSaver account, Kōura has the tools to help you out. Review your plan here!
Regular Financial Check-ins
Establish a schedule for regular financial assessments. Monthly check-ins can be great for your weekly budget, meanwhile a quarterly check-in is recommended for long-term goals. Adjust your financial goals based on life changes, celebrate achievements, and learn from setbacks. Consistent financial check-ins are the key to maintaining a healthy financial outlook.
Conclusion
Mastering your money is an ongoing journey that requires dedication and informed decision-making. By following this comprehensive guide, you'll gain a deep understanding of your financial health and be well-equipped to navigate the complexities of personal finance. Remember, financial well-being is a journey, not a destination, so commit to ongoing assessments and watch your financial future flourish.
Disclaimer
Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.