Financial Health

Why working on your Financial Health matters for the rest of your life!

Today I want to about our financial health as it is a topic which influenced my life over the last years dramatically. I am not here to tell you how to do it. When I found out how financial health influenced my life, it was an eyeopener for me.

We will divide financial health into several topics and work through them. How to rate your debt, savings, income situation and emergency fund?

In the end I would like to introduce some kind of rating system to you, where you are able to find out about your financial health. Not being where you are is not the problem – not working on it is!

So, let’s dive into the topic and get an idea what the meaning financially healthy is.

But before starting off: Where did you get your financial information from?

School does not teached to me to do financially well. My parents tried to, but as I am 40 today and the internet took over those ideas are more or less out of order. And to be honest: Talking about your financial health when you are “financially ill” is like self-flagellation.

From my point of view this topic is ways to unpopular to talk about. I mean, just imagine going out for a beer on a friday night and talking about financial stuff with your friends – really?

“Well Tobias, how did you do this week financially?”

“Mate, it was a mess. I received two bills I was not expecting and the washing machine went off without any sign”

“Ouch, but let’s make a plan to cope with those expenses”

Honestly, I would love to have those conversations more open minded and more often. But I guess it is something a lot of people want to talk about, but do not dare to do it.

Especially here in Germany we are pretty closed when it comes to talk about money. I mean, that is a problem in my eyes. Anyone is talking about the best way to become rich asap, but no one shows their finances to make this trustworthy. Have you ever asked you bank consultant, how his finances are doing? What his savingsrate is? How much money he saved in his rainy day fund?

I guess no one will ever tell you.

What is financial health?

Before I am getting too deep into the discussion, let’s have a short look at what I would like to talk about. There are several definitions of financial health, which are coming all down to the same point:

“Financial health is a term used to describe the state of one’s personal monetary affairs.” – Julia Kagan from www.investopedia.com/

“Financial health provides a sense of security about current and future finances. If you’re financially healthy, you probably aren’t worried about money.” – Carebook in their post “8 dimensions about health – Your finances”

“Financial Health is: The dynamic relationship of one’s financial and economic resources as they are applied to or impact the state of physical, mental and social well-being.” – Financial Health Institute in their post “Financial Health Defined”

To wrap it up, financial health is a part of your life. Proverbs like “Money is not important because [insert whatever you find]” are a kind of excuse for not doing financially well.

But let’s find a definition. What about this one here:

Financial health is your financial situation regarding the relation between your wealth and your life-risks.

This of course includes your savings and spendings, but also your debts, insurances and retirement savings. The more your future is save regarding financial impacts, the higher your rankings on a financial scale.

Turn things around if you do not understand them

Imagine your friend on a friday nights beer. “No bro, having insurances is a waste of money and nothing regarding your financial health”. Fair point in my eyes, as insurances have to cover a specific risk of your life and not general statistics. But when they do, insurances are a part of your health.

As people are more likely to understand things when they turn negative it is a good opportunity to talk about it that way. Let’s do not talk about savings, but about not having them. What would it feel like to have nothing left in the bank account?

Or debt. Looking around in todays society you are able to go into debt for nearly everything. You need a new TV? Use our debt model here and you will get it. Wanna go on vacacion? No problem, we will help you by providing a credit for you.

WTF – are you really serious?

Getting into debt to enjoy your holidays? This sounds like prostituting your future income to someone for a small happy moment. In 2018 about 59% of the German debts were made to finance a new car (31%) or an used car (28%). Around 6% were made to go on holiday.

But let’s get back to the topic. If you start turning things into the oppposite you might be more sensitive about their influence. Debts are your sold future income. Enjoy life today to step back in the future – what a ridiculous concept of living.

The 5 dimensions of your financial health

There are several ideas of how many dimensions might exist. I am cool with any of those. For me personally there are five dimensions which matter.

  1. Insurances
  2. Emergency fund
  3. Debts & credit
  4. Retirement saving
  5. Investments

I would like to dig a bit deeper into any of those dimensions. As I think those are always very individual there is no common way to work with them. There is just one big mistake: Not working on them!

We are always on the hunt for growing our wealth. From my point of view this includes taking care about the dimensions. You cannot suceed in one of them and ignore the rest to feel good. I decided to do well and care about all of them to receive the highest financial health for me.

What would your life be like, when you are doing good with your investments but not having an emergency fund? What if you lose your job tomorrow – would you have a good and comfortable night?

#1 Insurances – Use the principle to cover your biggest risks

If you are causing an accident, you are the one being responsible. You are responsible to cover the costs of your opponent. Those might be small when it is just a scratch in the side of his car. But it getting really expensive when your opponent loses a leg and is disabled for the rest of his or her life. Stay with me – you are responsible!

Insurances are there to cover those risks. Therefore it is important to cover the biggest risks in your life:

  • Your health
  • Your income
  • Your future
  • Your family
  • And whatsoever is important to you

I am not really into those insurance things. But personally I covered the risk of having an accident or getting ill with having no more income for me and my family. Occupational invalidity is a risk you are aware of at any time. So it is like the saving the minimum standard.

Additionally I covered the risks of getting into a court-thing for several reasons (legal protection insurance) and a liability insurance, which is mandatory here in Germany. As I am as an employee I also have a health insurance and an “unemployment insurance”. I have to put it into brackets as this is not an insurance, but something you have to pay as an employee to receive money from the goverment in case of unemployment.

#2 Emergency fund – Make the event of an emergency less risky

I already wrote an article about the emergency fund. I think it is absolutely necessary and there is not a single reason to not have it. For me the emergency fund describes money which is available instantly.

Depending on how the size of your rainy days fund is you might work with a part of it, but only in secured assets. And I don’t think about Buyback Guarantees of Propertybacked Securites. I am talking about assets you can access within some days or a week.

Usually emergencies happen at a certain point in our life we were not expecting them. Going on holidays is not emergency, but flying home to see your grandma for the last time might be one.

If you write down what might happen, you get an intention of the size of your rainy days fund. As a three-times father with a family our fund is quite big. I would not choose less than three monthly salaries. My personal target is to hit 12 times my salary.

I guess the size increases during our life. As a student living at home the size is pretty small and maybe just covers the next fridays night beer. Moving out, moving to somewhere else and having your first own furnishings will increase your safety needs.

So, the more you prepare for unexpected things, the less you will be influenced by any accidents.

#3 Debts & credit – Work on them and prepare for the future

You know me – having debt or credit is not bad. Not working on them is a huge problem. Word.

There might be situations where a credit is a legit solution. And there are times you need to go into debt to solve your issues. But when you have a credit, your main focus should be to get rid of it.

Debts are your sold income of tomorrow. You are not ready to enjoy something if you can not afford it. Work on your financial health and make those things your goal. But do never buy things now and pay them later. This might be comfortable, but is dumb af.

Financial health is about improving your status. Within your first goals you should focus on killing your credit and debts. The moment you are in debt is the moment where you are paying other people to lend you money. So beside your debt you pay an interest to the person lending the money to you. This is of course additionally money you have to pay on top of everything.

If your in debt, the points #1 and  #2 are of course important for you. There is no way you should not take them into consideration. Why? Simple answer: Insurances and rainy day funds are planned for life – credit is bad but only temporarily, if you focus on killing them.

#4 Retirement savings – Do not rely on others to take care of you

Now we are coming to the funnier part of financial health. Until now things were pretty boring like insurances but absolutely necessary to cover your risks. You should not start with step #4 if you havent done step #1 to #3. That might look like a shortcut, but it is not.

You might take race petrol and race tyres with you on the track, but if you forget about your race suite and helmet it gets really dangerous.

In a lot of countries there are retirement plans which are somehow tax-efficient. In the USA we are talking about the 401k and IRA/Roth IRA plans. I am not an expert for them, but usually you are allowed to save some of your money taxfree or taxdeducted into special plans, which start paying you an additional pension after your quit working. To max it out you are able to invest about 19k per year into it.

In the UK it is called ISA and you are allowed to invest 20k per year without paying taxes on it. And of course we have something similar here in Germany called “Riester-Rente” and “Rürup-Rente”.

I do not want to rate it. Those “products” are better than doing nothing to start. But you always have to watch the fees insurance companies charge you. But also the mutual funds you are investing in are charging fees, which adds up to a level, which might destroy your gains. Watch out!

In the end: You should have any kind of retirement plan. Your 401k, ISA or Riester-Rente is somehow taxefficient. It is your obligation to find the most attractive product for you. “I will teach you to get richt” from Ramit Sethi or “Money” from Tony Robbins are great books to start with.

#5 Investments – Built an additional income for your financial health

You have covered you big risks through insurances. Your rainy day fund hard grown to a level covering unexpected moments and you killed all of your credit and debts – or at least have a structured plan to do so. Additionally your retirement plans are maxed out to add more pension income for later.

That is the moment you should start with you investments. Maybe people will tell me “Why should I invest into retirement plans, when their fees suck?”. That is a good point. I made the same experience. The market goes up by 6%, the value of my retirement-plans goes up by 5% and I am charged 4,2% fees.

But still there is a big difference for me between retirement savings and investments. For me myself I started investing the max sum for the retirement plan into 70% MSCI World ETF and 30% MSCI Emerging Markets ETF. The total expense ratio is about 0,50% per year and their increase covers the market gain.

Investments are everything you are able to invest in to improve your wealth and maybe generate a passive income. I love the idea of generating additional income to one day cover my todays income. A good mixture of investments should lower the risk overall. I am currently investing about 40% into Dividend ETF, about 20% into dividend shares, 25% into P2P lending and 15% into crytos.

Investments are the last step of your fundamental financial journey

Financial health is about building your basement for the rest of your life. And if you financial health is good it will influence the rest of your life in a positive way. As mentioned before: Imagine sleeping well with several unexpected bills to pay but no money left? Will this work?

You have my understanding when you want to start with investments as they are generating income. Any other point before will usually not – especially not immediately. So of couse people would prefer the way to make money before thinking about their security.

But as I said before it is not clever to forget about your helmet and your race suite when heading to the race track, also “usually nothing happens”. Let’s turn it around: How much more are you willing to risk/give, when you know you re secured no matter what happens?

The way to finaicial health seems boring but will be rewareded

Understanding that financial health is about those five dimensions is crucial. I am working with a Google Sheet to track my finances. And here eversince those points were milestones. Maxing out my retirement plan is one. Years before the downpayment of my credit played a bit role. And so on.

Heading for financial freedom you will not be able to achieve it by missing out one of the dimensions. Sooner or later you will stumble into any one them. So it seems clever and smart to exactly start in that order as it describes the usual way of getting financially independent.

Set yourself goals. They have to be realistic. If you are able to save 10k per year, do not chose goals above 20k. The more you improve your financial health, the faster things will go on. Therefore it is okay to take challenging goals. But they have to be realistic. Otherwise the potential is huge to take your mood down.

Imagine those five dimensions as a traffic light. Your milestones should be to switch all lights on green. That will be the sign that you are heading full throttle into your financial freedom. With every green light you improve your financial health and become more powerful concerning financial things.

Improve your financial health step by step

The easiest way to start is to make something like a wrap up. Write down your expenses and spending. The more you master them the more you will be in a position of strength towards your financial health level. Knowing where your expenses come from gives you the power to redirect those into you savings for financial health.

I an second step you should improve your risks but killing them down. Insurances as well as a rainy day fund are not really hard to afford, but are absolutely necessary to feel safe.

And now you are already in a state of investing. First maxing out your retirement savings securing your future financial health and secondly working on your investments. you will find several concepts about it, which are all legit. I decided to go for cashflow-generating investments to secure my needs for the time ahead.

Start today by working on your financial health. It is essential for your general health and your level of safety. Sit down and define the goals for your personal dimensions. I hope I was able to inspire you a bit about those and gave you the first kick off to improve your financial health.

The feeling of making lights green on any of those dimensions is worth the time and pain you have to go through as it lasts for the rest of your life.

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