Why Should I Care About Personal Finances? The Effects of Money Mismanagement on Your Financial and Mental Health

Your bank balance is low; your bills are piled high, and so is your anxiety. Here is a truth bomb we all need to hear: managing personal finances is a critical skill to learn in life. For some people, it’s a matter of fulfilling both ‘wants’ and ‘needs,’ and for others, it’s a matter of survival.

Other than being able to keep a roof over your head, here are some reasons why you should care about managing your finances.

Why You Should Care About Personal Finances

Your Health and Wellbeing

Over a thousand U.S. adults were participants in The Mind over Money Study to discuss their feelings about their current financial situations. One of this report’s key findings was that Americans are worried about their financial future.

• 68% stress about not having enough money in their savings to retire
• 56% worry they cannot keep up with the cost of living
• 45% feel stress managing debt

Survey respondents also admit that financial stress affects other areas of their life.

• 43% feel fatigued
• 42% find it difficult to concentrate at work
• 41% say they don’t sleep well because of their financial burden

It’s concerning that money matters are a weight that many Americans carry.

Your Relationships

Furthermore, financial stress can have a considerable impact on relationships. According to a survey by The Cashlorette, 48% of American survey respondents who are married or living with someone say they argue over financial matters. As a result, one of the leading contenders for causing marriages to fail is moneyelated disagreements.

TD Ameritrade confirms this with data stating that 41% of divorced Gen Xers and 29% of Boomers say they ended their marriage because of disagreements over money.

Not caring about personal finances will negatively impact your health in the long term, your relationships, and your ability to take care of yourself and provide your family with financial security.

Your Credit Score

Maintaining a solid credit score and a good credit report can help you pass a credit rental check to rent a nice place to live, obtain a lease, a mortgage, or any other type of financing. Watching your credit card debt is equally vital as it helps build your credit score. Factors that affect your credit score and credit report are:

Payment Habits

A history of not keeping up with regular payments with several accounts over several years may indicate irresponsible credit behavior.

Debt Load

Carrying large debts, especially relative to your gross income, will hurt your credit score.

Late Payments

Late fees can be costly, especially with high-interest credit card debt. In addition, late payments will show the inability to keep up with your regular debt payments.

Other Financial Problems

Accounts sent to collection agencies and filing for bankruptcy are just a couple of financial problems that will kill your credit score.

Of all the factors, payment history is the most critical factor to consider because it accounts for 35% of a credit score.

Another reason you need a good credit score is to take on more debt if you need to. With a low credit score, you can expect any mismanagement of your finances will be present in your credit report. This can close doors to favorable loan terms and credit cards to help you obtain your housing, auto, and other needs.

Meeting Financial Goals

A survey of 1,000 American adults asked respondents what their top financial goals were. The top five responses were as follows:

• 20% answered, ‘Buying my own house or apartment.’
• 19% answered, ‘Having enough so I can finally retire.’
• 14% said, ‘Paying off credit card debt.’
• 10% responded, ‘Building an emergency fund.’
• 6% said, ‘Building my credit score.’

7% of the respondents felt that they would never reach their financial goals. When asked why they didn’t believe they could achieve it, 20% said their expenses were too high, and they had no discretionary income to use on other things. 14% said they have too much debt to pay off.

These are all common goals that people dream about achieving. Unfortunately, not reaching these goals is also a common problem for people who don’t care to manage their finances properly. A solid financial plan can turn your dream of achieving your financial goals into a reality.

Ways to Manage Personal Finances

Create a Budget

According to a survey by Penny Hoarder, approximately 55% of Americans don’t use a budget to manage their money. Penny Hoarder also determined that people who don’t track their spending tend to owe $5,000 or more in credit card debt. On the other hand, those who use a budget to track their money are more likely to know how much they spend and are less likely to splurge.

To create a budget, you can simply sit down with a pencil, notepad, and your pile of bills and get started. You can also use a spreadsheet program like Excel or download a budgeting app on your phone. Any of these methods of keeping track of your spending will work.

Calculate your fixed and variable monthly expenses once you figure out your net income, which is your after-tax take-home pay. Variable expenses such as groceries and gas are trickier to determine, so consider using a 12-month average from the previous year as a monthly expense for your budget.

The age-old saying ‘live within your means‘ still stands today. Try your best not to allow your expenses to exceed your income.

Monitor Discretionary Spending

Discretionary spending is money used for non-essential items and entertainment. A review of consumer expenditures in 2018 concluded that the top three areas where discretionary spending was the highest were:

• Food is eaten outside the home.
• Entertainment equipment and services such as sports equipment and hobbies like photography.
• Apparel products and services.

There is no single rule of thumb regarding how much money you can spend on non-essentials. There are many different ways to plan your spending in this area. One is the 50-20-30 rule, where 50% goes to necessary expenses, 20% savings, and 30% for everything else.

But if you live in an area with a high cost of living, have significant debt, or have a low-paying job, then 30% of your income for entertainment and non-essentials is excessive. Make a judgment call based on your financial situation.

Another way to budget for non-essential expenses is to rank them in order of importance. Think about the first few expenses that are a priority and set your budget for discretionary spending for the amount of those expenses.

You should also assess your recurring charges, such as any monthly subscriptions. We often continue to pay these types of expenses without any consideration as to whether the product or service is still of value to us and worth the cost. Cancel any recurring non-essential spending that you no longer need or value.

But if you live in an area with a high cost of living, have significant debt, or have a low-paying job, then 30% of your income for entertainment and non-essentials is excessive. Make a judgment call based on your financial situation.

Another way to budget for non-essential expenses is to rank them in order of importance. Think about the first few expenses that are a priority and set your budget for discretionary spending for the amount of those expenses.

You should also assess your recurring charges, such as any monthly subscriptions. We often continue to pay these types of expenses without any consideration as to whether the product or service is still of value to us and worth the cost. Cancel any recurring non-essential spending that you no longer need or value.

This way, you don’t have to dip into your savings and detract from your financial goals, and you don’t have to increase your debt at high-interest rates further.

Starting an emergency fund is a necessary part of the budgeting process. If you have a large debt that you would like to focus on paying off, continue to do so but put even amounts as small as $5 to $10 a week aside for emergencies.

Automate Savings and Invest

Set up automatic transfers from your checking account into your savings or investment account, preferably at the same time that your paycheck reaches your account. This way, your savings can keep accumulating without you having to think about it.

Retirement Plans

Even though this survey revealed that retirement was the second most prioritized goal, over one-third of Americans don’t see it even happening. In addition, 36% of Americans believe that they will never have enough money to retire.

It’s never too late to start investing to save for your retirement. A 401(k) is an employer-sponsored plan. First, check with your employer to see if they have an employee contribution matching program.

You would agree to have a percentage of each paycheck paid directly into an investment account in this program. The employer may match part of or all of the contribution. If you are self-employed and don’t have any employees, you can contribute to a solo 401(k) plan.

33% of private industry workers in America don’t have access to an employer retirement plan. Unfortunately, people often don’t save for retirement without access to a 401(k) plan. But if your employer doesn’t offer a 401(k) retirement plan, a great alternative is investing in an individual retirement account (IRA).

Again, automate transfers out of your checking account into your IRA so that you can continue to build your retirement savings.

The Importance of Financial Self-Care

83% of people who set financial goals feel better about their finances even after one year. Create a budget, be consistent with your tracking and commit to your plan. Automate your savings and build up an emergency fund. You will pay your debts before you know it, and your savings will grow. Not only will your financial health improve significantly, so will your health and peace of mind.

Originally published at Wealth of Geeks

By Nadia Tahir